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The Child Care Tax DeductiorICredit John R. Nelson, Jr:, and Wendy E. Warring INTRODUCTION The child care tax deduction/credit originated in 1954 as an itemized deduction for work-related day care expenses. It was limited to $600 and to households in which both the husband and wife worked and that had an adjusted gross income of $4,500 or less. Designed as both a labor supply and a relief measure, the deduction reached an average of 290,000 households in the first decade after its enactment. (For these data and their sources see Appendixes A and B.) To reflect the rise in family incomes, Congress updated it in 1964 by increasing the income ceiling to $6,000 and the maximum deductible amount to $900 for two or more children. These changes allowed an additional 125,000 households to claim the deductions, but the tax savings per household still remained the same--approximately $70 per year. By 1971, constant agitation for revision of the deduction cul- minated in several significant changes. It was renamed the "job development deduction," and Congress, specifi- cally the Senate, tripled the income ceiling to $18,000, increased the deductible amount eightfold to $4,800 per year, and allowed the deduction of housekeeping services to stimulate the employment of low-income persons as domestic housekeepers. These changes doubled the annual average tax saving per household to $135. Less biased against working mothers, Congress sought to provide tax relief to dual-career families in middle- and upper-income brackets. This revision altered one major purpose of the original deduction: relief for low-income families. It became instead a tax incentive for their employment in higher-income households. 206
207 In 1975, Congress updated it again by raising the income ceiling to $35,000, but this change was principally a compromise measure to postpone for further deliberation a major overhaul or one aeauccl~n. -l-l~a~ ~v=~. ma.__ came to fruition in 1976 when Congress dropped the job development title, removed the income ceiling, and trans- formed it into a 20-percent tax credit on care-related expenses up to $2,000 for one dependent and $4,000 for two or more dependents. As a credit, all eligible house- holds could claim the tax benefit whether or not they itemized deductions on their tax returns. In 1977, 2.85 million households claimed the child care credit and saved $517 million in income taxes--an average savings of $177 per household. This case study examines each of these four major revisions in the child care deduction/credit. In many respects the subject of this study represents a different genre from the other two cases. It is not a federal program or regulatory policy. Its enactment entails no new bureaucratic structures and very little administrative history. Yet income is transferred, regulations are promulgated, and the society is affected. Indeed, taxation is the one federal policy that touches virtually every citizen in a regular, direct, and visible manner. Three elements affect this policy formation process: the revenue and distributional effects of proposed changes, the equity of such changes, and the maintenance of incremental increases and decreases in progressive tax rates. The first consideration is an obvious outgrowth of the purposes of taxation: to raise revenue. The second seeks to ensure equal treatment for taxpayers in similar situations. The third is to avoid abrupt shifts in tax rates across small changes in income. The policy-making processes are confined chiefly to the House Ways and Means Committee, the Senate Finance Committee, the Office of the Assistant Secretary of the Treasury for Tax Policy, and the Joint Committee on Taxation. Each has an institutional role. The Joint Committee staff serve as technical adviser to the Congress. The bills originate in Ways and Means, which tends to be conservative in its measures. It is distinc- tive among congressional committees in its careful deliberations, its close alliance with professional staff, and, until recently, . . · ~ ~ ~ _ _ ~ _ . , - ; _ _, . . . its lack of subcommittees. Moreover, its legislation generally comes to the floor under a closed rule, though amendments are sometimes permitted. Since Wilbur Mills's departure as chairman,
208 however, these committee attributes have changed somewhat The Senate Finance Committee has similar attributes, with one major difference. Finance Committee bills are open to amendment on the Senate floor. Consequently, its measures are often amended to provide more generous tax benefits than House measures. The committee has less than final determination over its legislation, yet the Senate debates over tax provisions, Joseph A. Pechman observes, "rank among the most informed discussions held on the Senate floor." , . The role of the U.S. Department of the Treasury and its Internal Revenue Service (IRS) is to maintain the structural integrity of the tax system, to curb revenue losses from the special benefits so popular with Congress, and to represent the President's tax proposals before Congress. Treasury works to accomplish this through direct negotiations with congressional committees at each stage in the tax-writing process. Once passed by Con- gress, the tax bills become operative in substantially the same form in which they are written. Since 1948 only once has a president vetoed a tax bill: that veto by Gerald Ford in 1975 was the result of a conflict with Congress over a concomitant spending ceiling, not the tax provisions themselves. Although numerous judgments are made by the IRS and federal tax courts on specific applicability in individual cases, the basic principles and structure of the policy remain unimpeded between legislative enactments. The mechanics of the income tax are straightforward, though the nuances are often obscure to the point of unintelligibility. In principle, a taxpayer totals all income from wages, interest, dividends, alimony, etc., to arrive at a gross income. He or she then subtracts the allowable expenses incurred in earning that income (e.g., business and moving costs) to reach an adjusted gross income. These adjustments are "above-line" and open to all eligible taxpayers regardless of whether they elect the standard deduction or itemize. After calculating the adjusted gross income a taxpayer can either take a fixed standard deduction (now referred to as the "zero-bracket amount") or itemize deductions to arrive at his or her taxable income. In either instance the taxpayer is allowed a fixed exemption of a particular dollar amount from the taxable income for himself or herself and each dependent. The actual tax is based on the taxable income. From the tax itself a credit is allowed for certain items (or portions of items). A credit represents a specific
209 dollar amount subtracted directly from the tax liability. An adjustment to gross income or a tax credit benefits all eligible taxpayers regardless of their decision to itemize deductions. A deduction benefits only those who elect to itemize. Generally speaking, a deduction and an adjustment benefit higher-income groups more than lower- income groups, while a tax credit has the opposite effect. . THE ORIGINS OF THE CHILD CARE DEDUCTION In 1861 the federal government levied the first tax on individual incomes to raise urgently needed revenue for the Civil War .2 Until that time customs duties, excise taxes, and land sales provided all federal tax revenues. The income tax was a straightforward 3 percent levy on incomes up to $10,000 and 5 percent on incomes above that amount. The law allowed each taxpayer an exemption of $600. Congress raised tax rates in the next years to 10 percent on a net income between $600 and $S,000, 12.5 percent on income between $5,000 and $10,000, and 15 percent on income above $15,000. When the income tax law expired in 1871, the rate was 2.5 percent and the exemp- tion $2,000. After its expiration, excise taxes and customs duties resumed their runcclon or ~u~'>'l~y ,~v=~.- for the government until 1909. Congress attempted to revive the income tax in 1894. The tax was 2 percent on individual and corporate net income, with a $400 exemption for individuals. Personal property received by gift or inheritance was included in net income. The Supreme Court, however, declared the act unconstitutional in 1895. It ruled that the portion of the personal income . ~ ~ ~ ~ , - ; _ ~ _ ~ ~ ~ ~ ~ 1 ~ ~ tax levied on income from land was a "direct" tax and in violation of the constitutional requirement that direct taxes had to be apportioned among the states according to population. Despite the decision, agitation for an income tax continued. As the American economy matured and industry gained the strength to withstand foreign competition, Congress reduced tariff rates. Many groups saw the income tax as a way to compensate for the resulting revenue losses and inject a progressive element into the revenue ~ TO ~ ~1 ~ ohm ^~=cc~rv ctAt-~-c- ratified the 16th amendment to the Constitution and gave Congress "the power to lay and collect taxes on incomes, from whatever source derived, without regard to any census or enumera- tion." Shortly thereafter, Congress passed the income by ~ ~111 e 111 ~"~= 11~~~ ~LIZ ~ ~~ ~~~ ~ ~ ~
210 tax law. The tax applied to wages, salaries, interest dividends, rents, entrepreneurial incomes, and capital gains. There were two categories of tax levies: normal, a flat 1 percent rate on all income above $3,000 ($4,000 for married couples), and surtax, a progressive rate from 1 percent to 6 percent on larger incomes. It allowed deductions for interest on debts, nonincome tax payments, and business expenses. State and local government employees were exempted from paying the tax; the interest on federal, state, and local government bonds was also exempt. The surtax, however, applied to income exempted from the normal tax. In 1917, Congress introduced a credit for dependents and a deduction for charitable contributions. Successive changes continuously complicated the 1913 law. Not until 1939 did Congress codify the revenue acts that had accumu- lated over the years. By today's standards exemptions were high and few incomes were large enough to be subject to even the lowest tax rate. Prior to World War II the income tax applied mainly to a small number of people with high incomes and created tax liabilities of approxi- mately $1 billion. The 1939 code did not remain unmolested for very long. World War II brought a new dimension of complexity to the tax laws. In the national effort to raise revenue, exemp- tions were greatly reduced, rates were increased, and substantial growth coupled with an upward shift in income occurred in the tax base. Congress also made a series of structural changes in the tax code. Beginning with tax- able year 1941, taxpayers whose gross incomes did not exceed $3,000 from specified sources were able to submit a simplified return. The return allowed them to deduct a standard percentage of earned income from their adjusted gross income. Those who did not use the short form were required to itemize their deductions. In 1944 legislation further simplified tax returns by making the standard deduction part of the Internal Revenue Code. Taxpayers had the option of deducting 10 percent of their adjusted gross income up to $500 from 1944 to 1947 and $1,000 from 1948 to 1970. When it was first introduced, over 80 percent of taxpayers used the standard deduction. The growing complexity and the residue of anachron- istic provisions had rendered the tax code difficult to understand and administer. At the outset of the 1950s the Treasury Department and the Joint Committee on Taxation made preparations to simplify and reorganize the 1939 Code. These resulted in the Internal Revenue Code
211 of 1954, the last codification of the tax law to the present. The groundwork for a major tax revision began as early as l9Sl, but most of the legislative tax writing took place in the House Ways and Means Committee during the first session of the 83rd Congress. In that session the committee began drafting H.R. 8300, the nucleus of the 1954 code. The bill contained approximately 27 major new tax provisions affecting both corporate and individual taxpayers. Among these was an itemized deduction for child care expenses. As one might anticipate, the child care deduction ignited some controversy in Congress. The issue of a child care deduction was not new. Litigation on the subject began as early as 1939. In that year a married couple contested the IRS's exclusion of child care as a business deduction. The plaintiffs argued that expenditures for nursemaids should be con- sidered an ordinary and necessary business expense of the wife. They contended that expenses incurred to care for their young children were necessary to earning an income because without some provision for care the wife would not be free to leave her children to pursue employment. The court characterized their argument as the "but for" test and rejected it as too broad: The fee to the doctor, but for whose healing services the earner of the family income could not leave his sickbed; the cost of the laborer's raiment, for how can the world proceed about its business unclothed . . . might all by an extension ~ ~ ~ ~ ~ _ ~ ~ ~ ~ of the same provision De conscruea as neck the operation of business and to the creation of income. Yet these are the very essence of those personal expenses the deductibility of which is expressly denied .3 The court explained that child care, like other aspects of family and household life, was nothing other _, than a personal concern because "the wife's services as custodian of the home and protector of its children are ordinarily rendered without monetary compensation." The same work performed by others is still of a personal nature. Although the court conceded that certain business expenses were often personal, such as entertainment, traveling expenses, or the wardrobe of an actor, it drew a fine line between activities that are ordinary to the direct accompaniment of business pursuits and those that relate "in some indirect and tenuous degree" to employ
212 ment but are "of a character applicable to human beings generally. t'4 Expenditures for child care, the court concluded, existed on a personal level regardless of an individual's occupation. Taxpayers did not give up after the 1939 decision. Several subsequent cases claimed a child care deduction as an allowable expense for the production of income under Section 213. In each case, the court affirmed that child care expenses were not deductible under existing tax laws. The thrust of the court's decisions was that all personal deductions were granted by legislative discretion and could not serve as precedents for new deductions, however similar they might be in principle . . Indeed, the same argument was applicable to business deductions. What constituted an expense "ordinary and necessary" to business was by no means unambiguous. The courts generally followed the legislature and IRS in their determinations of proper business expenses. Like personal deductions, business expenses were as much a matter of fiat as principle. No single consideration readily explains why members of Congress and the administration proposed a child care deduction in the 1954 code. Apparently, several circum- stances turned the cases brought by a few determined taxpayers into law. In 1953 there were 19 million women in the labor force, who constituted 33 percent of the entire working population: 27 percent of all married women worked, and there were approximately 9 million working mothers. About 25 percent of working mothers (2.25 million) had children under the age of 18, and 16 percent (1.44 million) had children under 6 years old. In other words, 64 percent of the working mothers with minor children had preschool children.5 Social mores notwithstanding, working mothers were fast becoming a fact of American life. There was some precedent for federal involvement in helping working mothers care for their children. In 1942 the Federal Works Agency obtained an interpretation of the Lanham Act for defense housing and public works that allowed funding of day care facilities. This program spent $52 million over three years to care for 109,000 children across the country. When World War II ended so did federal aid, but during the Korean War, Congress passed an authorization for day care grants: the Defense Housing and Community Services act. Although with this act Congress had formally acknowledged the need for day care services due to the steady influx of women into the
213 labor force, the provision was never funded and the authorization lapsed with the armistice. In 1953 the Children's Bureau and the Women's Bureau of the Depart- ment of Labor sponsored a conference on services for the children of working mothers. They stressed the growing number of mothers entering the labor force to fill vacant jobs and to supplement family income. The conference concluded that these women, many the sole support of their children, required government aid for their children's care. The issue, therefore, was far from dormant.6 There was much support for some sort of child care deduction. The CIO, the American Nurses Association, the American Hospital Association, the American Federation of Government Employees, the Office Employees International, the American Bar Association, and the American Institute of Accountants all supported a deduction. A report of the Joint Committee on Taxation observed that a "large number of letters" had recommended special tax treatment for child care expenses ;7 29 members of Congress proposed or spoke in favor of such provision. The deduction was not a partisan issue. It turned upon considerations less cosmic than the then heated battle between Democrats and Republicans over redistribution and balanced budgets. Proponents offered three rationales for the deduction. First, child care expenses were necessary to the conduct of business and hence deductible. Second, working mothers were compelled to seek employment by economic necessity, thus defraying their child care expenses was a justifiable relief measure. Finally, tax subsidies for child care would enable welfare mothers to avoid the dole and support their children through employ- ment. The costs of the Aid to Dependent Children (ADC) _ program would thus decline. Within these basic overlapping rationales, there were many nuances among the bills. Generally, however, they raised two major questions: Should child care be treated as a business or personal expense, and what should define a taxpayer's eligibility for the deduction? The first question involved where the deduction should be allowed. Business expenses, as adjustments to gross income, were deducted before personal items, thereby reducing the taxpayer's liability regardless of whether he or she took the standard deduction. If the child care deduction were incorporated as a business expense, then the qualified population would include all otherwise eligible taxpayers with a dependent, whether or not they itemized their returns. The 75 percent of the taxpayers who took the
214 standard deduction in 1954 would then be able to deduct child care expenses. The second question involved which taxpayers were eligible for the deduction. The taxpayer, naturally, had to have a dependent child and be gainfully employed. Some bills extended the deduction only to widows, widowers, and divorced or separated mothers. Others allowed all families with both parents working to claim it. Some placed income limits on families and varied the age limits for eligible dependents. Supporters of the deduction, who equated child care with a business expense, included the American Bar Association, American Institute~of Accountants, and American Nurses Association. An institute representative summarized this rationale in testimony before the Ways and Means Committee: "Taxable income," he stated, was only that portion of the gross amount earned that remained after expenditures "necessary and ordinary to the produc- tion of income" were subtracted. Since child care was an ordinary expense to the production of income, deducting it was therefore legitimate under the current code. An amendment to Section 23 of the 1939 code covering business deductions would only affirm what was true though miscon- strued by the courts. The American Nurses Association advanced a similar case. Congress, they argued, had recognized that it is equitable to tax only net income-- income actually available for the taxpayer's discretionary use. The association added that expenses such as alimony and entertainment, currently deductible under this prin- ciple, were more in the nature of personal expenses than are the payment of wages for services to a custodian of one's child.8 Representatives in Congress echoed the belief that a child care deduction was consistent with the principles of a business deduction. Many of their arguments, more- overy stressed not only the equitable nature of the deduc- tion, but also that a failure to enact the provision would prove discriminatory and inhumane. Representative Kenneth Roberts of Alabama, for example, argued that women and working mothers bore an unjust burden because of an outdated court decision. nit is a little hard," Roberts concluded, "to reconcile the present insensitive attitude on the part of the government which allows a lawyer to deduct entertainment fees lavished upon a prospective client . . . which will not grant this privilege to the working mother who toils all day in the factory and works for her family in the evening in the hope that her children may have a better life."9 In
215 sum, several members of Congress and advocates from various interest groups in favor of a child care deduction saw the principle of a business expense deduction as a precedent for allowing a deduction for child care. The second basic rationale advanced the child care deduction as a relief measure for working women. Supported by the CIO and other unions with female members, this argument involved debate on a wider range of issues. The legislators favoring this position needed at the very least to prove that women were compelled to work. They had to disabuse their fellow legislators of the current notion that women worked only for personal pin money.~° They had to demonstrate, in the words of one representa- tive from New York, that the "great majority of these (working) mothers would sooner prefer to remain at home and devote themselves to raising their children were it not for economic circumstances which force them to become the breadwinners of their family." The most obvious and persuasive example of economic compulsion was that of widows and widowers who were the sole means of support for their children. The case became more difficult to prove when mothers worked despite the presence of a working husband. Opponents of a broad deduction asked why these wives could not stay home where they belonged. Why, in other words, should the deduction not be restricted to single parents? Supporters answered that most women worked because their families desperately needed the money. The low income of households with working women demonstrated that necessity, not choice, dictated these mothers' entry into the labor force. The deduction was a relief measure for them and not an induce- ment for those mothers still at home to seek employment. The evidence, they concluded, demonstrated that very few mothers work if they have a choice. The third rationale involved the potential of lowering welfare costs by providing a tax incentive for ADC fami- lies. Representative James Davis of Georgia observed that "this nation spends hundreds of millions of dollars each year for child welfare, aid to dependent children, etc., but when a mother has the courage to support her children by working rather than accepting government aid, she is penalized by the law." Others praised the working mother for her "courage" and "independence" in working when the cost of day care rendered it more lucrative to stay home "in idleness and rely on the country welfare board to take care of her." The child care deduction, Davis emphasized, would guarantee working parents the
216 money to find "proper care" for their children. He promised that the deduction would aid in "keeping families together, preventing juvenile delinquency, and having children reared under influences conducive to good citizenship." 2 The implicit counterpart of women's needing to work was the economy's need for women workers. "An important point to make," one member of Congress explained, "is that not only do women work because they have to, but under our present economic system we need these women workers."~3 The memory of World War II was fresh, and the United States was involved in the Korean War. Testifying before the Ways and Means Committee, one witness adduced that if the country's defense production and military requirements continued to expand, more women would be called to work. Women, she added, are the nation's greatest source of reserve labor needed not only in times of emergency, but also in peacetime professions such as teaching and nursing. 4 In the early 1950s there was a serious labor shortage in these professions traditionally filled by women. Many contended that the low wages prevented women from continuing to work in these fields after having children. They simply could not afford to work and pay for the care of their children. Representative Roberts explained that "the present inequitable tax law has an adverse effect on the welfare of the country by making it difficult to keep women in the fields of teaching and nursing where a critical labor shortage exists." These jobs were underpaid to begin with, and "nondeductible child care expenses" made it "hardly worthwhile for these women to continue to work once they have families."~5 The American Hospital Association and the American Nurses Association agreed. The nurses association contended that although more nurses were working in 1954 than at any other time, a critical shortage of nursing services in cities and rural areas still existed. The shortage could be remedied in part by allowing working women to deduct expenses for the care of their children. They pointed out that although 60 percent of all registered nurses were active in nursing, only about a third of those with dependent children were practicing their professions. Inactive nurses, who were otherwise willing to work, simply could not afford to do so. Tax relief, they contended, would create incentives for women to return to work. 6 There was a certain paradox between the labor supply and rationales of economic necessity. Those who argued
217 for passage of the deduction to relieve mothers compelled by circumstances to work contended that it would not act as a work incentive. Those who argued on the grounds of labor shortages were implicitly contending that the deduction would be a work incentive. This paradox, however, appears to have mattered little to congressional supporters of the deduction. Most members did not object to facilitating the return of nurses and teachers to the work force or encouraging mothers to seek employment in the country's labor-short defense plants. Neither did most legislators object to encouraging poor or husbandless mothers to work to support themselves and their families. Nevertheless, some legis- lators thought that by granting the benefits of the deduc- tion to all working mothers the wrong group of mothers would find an incentive to seek employment. Representa- tive Noah Mason of Illinois did not want to give the deduction to the kind of mother who might neglect her responsibilities to her family in order to earn some extra spending money. As he saw it, the problem in drafting the child care deduction was to draw a line "between those women who have to work, are compelled to work because their husbands do not care enough, or because they are unable to earn money or incapable of earning it, and those women who want to work to earn extra money to buy things they want that their husbands cannot afford to buy them."t 7 In congressional considerations of the child care deduction a tension surfaced between those who viewed women as working individuals and taxpayers and those who viewed women as mothers--sentinels of home and family. Delimiting eligibility for the deduction was essentially a matter of assuming a position on these views. The question of eligibility brought the legislative debate into the realm of values and assumptions about family life. The following exchange between Mason and Nancy Henderson, a working mother, illustrates this debate particularly well: Mr. Mason: But you think that when a young career woman gets married she should not give up her career. She should then adopt the dual obligation and responsibility of raising a family, keeping a home and holding on to her career; is that it? Mrs. Henderson: That, of course, is up to the individual's personal decision whether or not
218 she wishes to continue to do that. I don't think the law should discriminate against her if that is what she wants to do. Mr. Mason: Just at present our employment is almost full capacity, but suppose we have a slight depression and we have several million unemployed men. Then would you say that she should have the right to her career as well as her married privileges? Mrs. Henderson: I would say yes, certainly, if she is more capable. I do not think you would prefer to fire a woman who was producing more than a man who was producing less. She is going to be kept if she is an economic unit. Mr. Mason: I am thinking of the thousands, if not millions, of women who are married who have families who have responsibilities but who prefer to neglect these obligations and responsibilities in order to go to work and earn money which they can spend upon them- selves in spite of the fact that their husbands are earning enough for a pretty fair living. At stake in determining who was eligible for the deduction was the fate of the deduction as an instrument of economic policy as well as social policy. The eligi- bility criteria would control the amount of relief given to taxpayers. Moreover, they might influence which mothers went to work and therefore which children would receive nonparental care. With respect to the deduction's economic impact, the eligibility criteria might curb the extent to which the deduction acted as an influence on the entry of women into the labor force--whether to meet a general demand or to fulfill specific needs in certain professions. Eligibility restrictions might also limit the deduction's affinity to a business deduction and consequently limit the degree to which a working woman received "equitable" tax treatment. In a detailed report on the various proposals, analysts within the Treasury Department and Internal Revenue Service (then the Bureau of Internal Revenue) raised several major questions concerning the child care deduction. The report expressed concern over the number of taxpayers eligible for the deduction and consequent revenue loss. It warned of establishing a precedent for
219 other "special expenses associated with employment" if child care were treated as a business expense. Finally, the report noted the "significant administrative diffi- culties" that a deduction presented. It concluded that "these questions may raise serious doubts as to the desirability of providing the proposed tax benefits to [all] working parents." The report in effect opposed any deduction that extended the administration's original proposal. In his tax message President Eisenhower had suggested "some tax allowance" for the actual costs of providing care for small children of widows and widowers compelled to work outside their homes. In addition to widows and widowers, a mother forced to support her family because of her husband's incapacity was also eligible. In their consultations with the Ways and Means Committee, Treasury personnel advocated this proposal.~9 Underlying this debate was a more fundamental issue of the infrastructure of the tax code. If one desired equity in the code, then the putative value of homemaker services should be included in a household's income and taxed accordingly. Since assessing the value of these services and levying a tax on them were so alien to common perception of income, Congress had not incorporated such a provision in the tax laws. The effect of this was to create a disincentive for homemakers to seek outside employment. Not only would they have to compensate for the loss of homemaking services, but their outside income would be subject to taxation. The tax structure created a distortion in the labor market. Since Congress did not consider taxing homemaker sevices, the question then arose, to what extent, if any, did Congress and Treasury want to create another tax distortion to compensate for it. At this point in the decision-making process consti- tuent demands, lobbyist pressures, and the ideological preferences of individual members of Congress entered. Once one acknowledged that the tax system was distorted, the issue then became, in the words of one former congres- sional and Treasury staffer, "are we distorting it in a good or bad way?" The ultimate decision rested less on the structural integrity of the tax system than on the legislators' ideologies and the constituencies to which they responded. When passed by the House as part of the general tax revision measure, the child care deduction (Section 214) conformed substantially to the administration's proposal. The bill specified that the deduction could not exceed $600--a figure based on the estimated median monthly cost
220 of child care, $50. Deductible expenses could include only those incurred in pursuit of gainful employment. The committee considered child care as care for children under the age of 10 (16 if the child were physically or mentally unable to attend a regular school), since the available data indicated that such costs declined for school-age children, becoming negligible for children over 12. Payments made to dependents of the taxpayer for the care of her children were not considered eligible under the section. Only widowed or divorced mothers, widowers with children, and mothers with incapacitated spouses were eligible to deduct, if they itemized, the child care expenses they incurred while working. The House report on the tax bill explained that this provision was consistent with the principle of a business deduction. Women under these circumstances had to pay child care expenses in order to earn a livelihood. The expenses could thus be compared to an employee's business expense. This justification was only a partial explanation. Widows and widowers evoked an image of needy parents struggling to provide for their children. Tax breaks granted to these individuals apparently accorded with a portrayal acceptable to most House members of which women should be working and which should not.20 Upon receiving the House version of H.R. 8300 in early April 1954, the Senate Finance Committee held extensive hearings on the general topic of tax revision. Little, however, was heard from those concerned with the child care deduction in particular. Although retaining the basic structure of the House version, the Finance Com- mittee made several significant changes in Section 214. The committee allowed the deduction for all working mothers provided that they filed a joint return with their husbands. However, they placed an income ceiling of $4,500 on any dual-career household claiming the deduc- tion. The amount of allowable deduction decreased by the amount by which the combined adjusted gross income of a husband and wife exceeded $4,500. The Senate report pointed out "that in many low-income families, the earn- ings of the mother are essential for the maintenance of minimum living standards, even when the father is also employed. . . . in such situations . . . child care may be just as pressing as in the case of a widowed or divorced mother. .~2 ~ The Finance Committee also included expenses paid for the care of any dependents who were mentally or physically incapable of caring for themselves, on the assumption
221 that such expenses were effectively the same as child care costs. Finally, it raised the age limit for children from 10 to 12. The committee retained an important provision of the House bill: the maximum amount deductible for child care in any single tax year could not exceed $600. The reasons for retaining this provision apparently involved Senate concerns over containing the revenue loss of the deduction .2 2 In conference the House acceded to the Senate's amend- ments. The House version of child care deduction would have meant $40 million in revenue losses in fiscal 1955 and would have benefited approximately 300,000 taxpayers; the final version was estimated to cost $140 million and to benefit potentially 2.1 million taxpayers. When enacted, Section 214 contained measures associated with business deductions on one hand and measures that stressed the personal nature of child and dependent care expenses on the other. The personal nature of child care deduction was affirmed by the fact that the deduction was not added to the business deduction section of the tax code. Excluded from this section, child care expenses could only be deducted by taxpayers who itemized deductions on their returns. The provision also restricted the deduc- tion to $600 for a taxable year and set an income ceiling on the adjusted gross income of a married couple who could use the deduction. No income limitation was imposed on those claiming business deductions.2 3 The business nature of child and dependent care expenses was reflected in one of Section 214's fundamental rules. The section stated that a deduction for dependent care could be taken only "if such care is for the purpose of enabling the taxpayer to be gainfully employed." The deduction was clearly linked to the production of income. Deductions for the expenses of child care were legitimate only for periods in which the taxpayer was gainfully employed or in active search of gainful employment. Thus, a woman who worked part time and employed a baby- sitter for the full day could deduct only the portion of the expenses attributable to her working hours. Further- more, if a taxpayer employed a housekeeper who cooked and cleaned in addition to providing care for the taxpayer's children, only the portion of the housekeeper's salary allocable to child care could be deducted.2 4 Many compromises had been made in passing the child care deduction. Retention of the deduction in a separate section of the code helped to ensure that its passage would not serve as precedent for wholesale expansion of
222 eligible business adjustments to gross income. As an itemized deduction, child care expenses still possessed the character of personal expenses. They were, however, deductible expenses not only for single women or widowers with children, but for all families within the income limits, provided that both parents worked. Although the final bill expanded both the site and scope of its pro- posal, the administration would not consider vetoing a very large, complex tax revision for the sake of changing one very minor deduction. The President signed the new tax code, child care deduction and all, into law in 1954. IMPACT AND REVISION: 1954-1964 The child care deduction brought much less tax relief than Congress had estimated. In contrast to their estimate of $140 million in tax savings to 2.1 million households, the deduction provided only $18 million in savings to 273,000 households in 1954 and $24 million in savings to 329,000 households in 1956. Either most of those paying for child care were unable to claim it due to the restrictions, or most working mothers were not using formal child care arrangements. Members of Congress appeared to have assumed that the former was true and, in 1957, began introducing legislation to liberalize the deduction. Two bills would have permitted a married male taxpayer to deduct the expenses for the care of his depen- dents, if his wife were mentally or physically disabled. Another would have increased the amount that a taxpayer could deduct for the care of dependents. The following year a member of Congress offered a bill to remove the income limits on taxpayers deducting child care expenses. This bill also sought to increase the dollar amount of the deduction. In 1959, two more congressmen proposed bills to amend the deduction by increasing the amount that a taxpayer could deduct. One also recommended allowing a taxpayer to deduct expenses for the care of certain dependents, if one spouse were incapacitated. Unsuccessful attempts to liberalize the deduction con- tinued into the early 1960s. In October 1962 a bill to make the child care deduction available to "a wife who has been deserted by and cannot locate her husband on the same basis as a single woman" passed the House unanimously but, in the preelection chaos, never reached the Senate floor.25
223 Several circumstances coalesced to change the fortunes of the child care deduction in 1963. The election of John F. Kennedy in 1960 brought the Democrats to power for the first time in 8 years. Although cautious during his first year in office, Kennedy subsequently broached a series of economic and social intiatives that focused attention on the nation's poor and, more important, incorporated a Keynesian approach to fiscal policy. The centerpiece of his fiscal policy was a broad tax cut.2 6 In his message to Congress on taxes, he outlined the economic problems of the country that necessitated such a cut. The chief problem, he declared, was the economy's unrealized potential--slow growth, lack of investment, unused capacity, and persistent unemployment. The tax system as it currently stood stifled economic growth by withdrawing from the private sector too large a share of personal and business incomes. It also narrowed the tax base with the special preferences and provisions it contained. A narrower base required higher tax rates, added complexities, and promoted inequities that under- mined the morale of the taxpayer and inhibited capital formation. Kennedy's proposals for the reform of the tax code included reducing individual and corporate income taxes, broadening the tax base, and removing certain inequities and hardships. Under the rubric of removing inequity and hardship, he recommended a liberalization or the child and dependent care deduction.2 7 The President's proposal on the child care deduction was in large measure shaped by the recommendations of his Commission on the Status of Women.28 Created by execu- tive order in December 1961, the commission received a broad mandate to explore virtually all social and economic issues affecting women. Chaired by Eleanor Roosevelt and Assistant Secretary of Labor Esther Peterson, the commis- sion included cabinet heads, members of Congress, and civic, labor, and business leaders. The commission dele- gated several major topics for study to seven committees, two of which--social insurance and taxes and home and community--dealt specifically with the child care deduc- tion. Both committees issued reports critical of the existing deduction. . . . ~ ~ ~ 1 .1A The committee on social Insurance and Cant ~V11~'U"~" that the $600 limit on the deduction was inadequate when more than one dependent required care. As evidence they offered a 1961 study in Texas revealing that expenditures for nursery and baby-sitting services averaged a minimum of $58.22 per month ($700 a year) for mothers with
224 children under 17. They suggested increasing the maximum deductible amount for each child and removing any restric- tions on the number of children whose care expenses were deductible. They criticized the income limitations of the deduction as too restrictive due to the sharp rise in family income since 1954. At that time the median income of families with working husbands and wives was approxi- mately $5,336; by 1961 it was $7,188. The committee proposed an increase in the income limitation on dual- career families from $4,500 to $7,500. The maximum allowable deduction would be reduced by one dollar for each dollar of income above that level. They believed that the higher income ceiling would allow more taxpayers to use the deduction. In proposing a new limit on the joint income of families of working wives, however, the committee supported some limitation as "justifiable in the case of wives whose husbands are able to work. ·~2 9 The committee on social insurance and taxes also suggested raising the age level of eligible children. Although they found it difficult to pinpoint the exact age beyond which children no longer required supervision, 14 seemed attractive as a compromise. They recommended allowing the deduction of child care expenses if the mother were confined to an institution. The problem they encountered was the technical difficulty of defining a noninstitutionalized spouse's "incapacity" to care for her children. The committee noted that the criterion, "ability to earn," which determined if a husband was incapable of self-support, could not be applied to a housewife. Although they suggested that the Treasury Department "give sympathetic study to the feasibility of extending the deduction to all cases in which the wife is not able to care for the children," the committee con- cluded that institutionalization was the only unambiguous criterion for judging a mother's capability of caring for her children. Their final recommendation was that any government aid received by the child, either directly or through parent-guardians, should not be taken into con- sideration in determining a child's eligibility for tax purposes. They believed that low-income widows had greater difficulty than higher-income widows in proving that they provided 50 percent or more of their child's support .3 0 The committee on home and community also discussed the deduction and made recommendations similar to those of the committee on social insurance and taxes. In establishing the general importance of the child care
225 deduction their report cited a 1958 census survey. The survey ascertained that 5 million children under 12 had working parents. Of these, 12 percent (600,000) were cared for at least for some time by nonrelatives, and 8 percent (400,000) had no alternative care arrangements while their parents worked. There were 500,000 families with children in which the mother provided the sole support, 117,000 families in which the father alone was present, and 3 million families with children under 6 in which both parents worked. The committee concluded from these data that 3.6 million families required child services; current facilities, however, cared for only 185,000 children. Their report regarded these facilities as extremely inadequate. Although the committee lamented that so many women had been n forced by economic necessity or by the regulations of welfare agencies" to work despite the presence of young children, they affirmed the right of all women who elected to work to have child care services available .3 ~ care Even on the part of the commission's committees, the tenor of the discussion on reform of the child care deduc- tion retained the traditional perception of the tax measure as justified chiefly by economic necessity. While expressing the belief that child care services should be available and accessible to all women who choose to work, the committee on home and community found it, nonetheless, "regrettable" that women with very young children sought employment. The commission left the purpose of the child care deduction ambiguous. ~ allowed families to retain their financial viability with- out the dole as well as a measure of equity that allowed any married women with children to enter the labor force without the unremitted burden of child care. In its proposals to Congress the Kennedy administra- tion adopted many of the commission's recommendations. Articulating the administration's position, Secretary of the Treasury Douglas Dillon explained that the deduction was too restrictive in light of current income levels and costs. Specifically, he proposed that the deductible amount be raised to a maximum of $1,000 for three or more children. The present limit of $600 placed an unfair burden on those families with more than one child, partic- ularly if the children were provided care outside the home. The costs of such care rose in proportion to the number of children. Second, Dillon asked that the deduc- tion be allowed at higher income levels for married women. Raising the income limitation on the deduction It was a welfare measure that
226 from $4,500 to $7,000 would, he argued, provide more effective aid to working mothers at current income levels. The administration also wanted to raise the age limit of eligible children from 12 to 13. Finally, Dillon recom- mended that the deduction for child care expenses be extended to a married man with an institutionalized wife. He argued that these circumstances were comparable to those of a widower who was allowed the deduction under current law .3 2 Offering a different, though not unprecedented rationale, Secretary of Labor Willard Wirtz also testified for the liberalization of the child care deduction. Wirtz explained that despite current high unemployment levels, there were actually labor shortages in some occupations. "[Some] of those areas in which we presently experience the worst shortages, as nursing being perhaps the most obvious illustration, are occupations which involve women." Women with these key occupational skills could not assuage the shortages without some tax relief for the care of their children. He concluded that the current deduction was clearly insufficient to this end.33 Congress revised a small part of the child care deduction in early 1963. On February 4, the Ways and Means Committee unanimously reported the deserted wife bill, which had died at the end of the last session in the Senate. The Committee explained "that where women clearly have been deserted by their husbands, they should be eligible for any child care deduction in the same manner as a widow." The House adopted the bill for a second time on February 26. Three weeks later the Senate passed the new measure, and in April Kennedy signed it.34 It is unclear why this provision was singled out for quick passage among the several bills seeking to amend the child care deduction. The Treasury Department supported it, though preferred "to consider the instant amendment in light of the overall proposals with respect to Section 214. n One distinction between this amendment and the others might have influenced its separation: It was more closely associated with the basic principles of the 1954 tax measure. It maintained the tradition of the child care deduction as a limited relief measure for those women compelled to work. In presenting the provision to the House Ways and Means Committee, Chairman Wilbur Mills placed deserted women in the same category as single mothers. "The woman," he observed, "who has been deserted must-normally work and provide child care." In this rationale, the Treasury Department concurred: "Since the
227 child-care deduction was originally authorized to allevi- ate the burdens on families where the mother had to work in order to maintain minimum living standards and had to pay for child care while outside the home, it seems inequitable to deprive deserted wives of this form of assistance when they are in similar circumstances." Unlike the many other proposed amendments to the child care deduction, this one was a clear extension of an already acknowledged goal of the deduction--subsidizing mothers who had no choice but to work.35 The House bills embodying the other administration amendments for the deduction, however, had much tougher going in Ways and Means. At the initial meeting between Treasury personnel and committee members and their staff, the latter agreed to the major administration proposals - '= i c i no Ph" ; norms ~ imit to $7,000, the deductible amount to $1,000, and the age limit to 12. They also agreed to extend the deduction to single fathers and husbands with incapacitated wives. Participants con ~ 1 & ~ ~ ^ ~ a ^ ~ ~ ridered chancing the deduction to an above-line adjust- ment to gross income, which would allow its benefits to families electing the standard deduction. They decided against this change despite the fact that such a change would make the deduction a more effective aid to low- income families. "More importantly," they determined, "there is the problem of integrating the deduction within the general objectives of the reform program and giving it its proper emphasis within the code." Child care expenses "are essentially personal expenses, as distin- guished from business expenses . . . [;] it would set an undesirable precedent to grant [them] a more favored tax treatment than is now generally allowed to other types of personal expenses." The favorable decisions of this early meeting were reversed in the full committee a few months later. Chairman Mills, the Treasury staff reported, "did not appear to favor the increase in the child care deduction and there did not seem to be much sentiment in the com- mittee for it. n Members simply wished to avoid any tax incentives for mothers to seek employment.3 7 The committee's final bill excluded most of the President's major recommendations with respect to the child care deduction. The committee did raise the limit of the deduction from $600 to $900 if the taxpayer had two or more eligible dependents, but refused to increase the income ceiling of $4,500 on dual-career families. They granted the deduction to a husband whose wife was incap
228 able of caring for herself or institutionalized for a period of at least 90 consecutive days. For the purposes of the deduction, deserted wives were placed in the same category as widows and divorcees, and the age of qualified dependents was raised from 11 to 12. Significantly, working mothers whose husbands were present were excluded from all these changes. For the most part, the committee explained their actions as an effort to "update" the 1954 provisions. In raising the maximum deduction to $900 for single parents with two or more children, they reiterated the rationale of the provision (aiding mothers forced to work) as their general explanations for the change. The House passed their tax bill without amendment.38 Since the House bill incorporated most of the major tax reductions sought by the administration, Treasury was unwilling to challenge the measure over the relatively minor issue of the child care deduction. It was not politic to risk alienating the Ways and Means Committee in a Senate battle over the deduction's provisions; the administration proffered only tacit support.39 Several senators, however, were determined to see the administra- tion's and the commission's proposals realized. On the floor, Senator Maurine Neuberger of Oregon offered a bill to amend the House version of the deduction. Neuberger, a member of the Commission on the Status of Women, proposed an increase from $4,500 to $7,000 in the income pelting of the deduction. "The question," she explained, "is not whether women and mothers would be encouraged to work through the child care tax deduction. Twenty-four million women [one third of the labor force] are presently employed in our working force, and I think it desirable to accept facts as they are. . . . By 1970, it is forecast that the workforce will contain 30 million women." Neuberger concluded that expansion of the child care deduction would be consonant not only with achieving equity in tax laws, but also with the spirit of the Equal Pay Act of 1963 mandating equal pay for equal work.40 Her explanation was not far removed from previous efforts to justify the extension of the child care deduc- tion to all working mothers as a business expense. Neuberger's amendment did not attempt to differentiate among working mothers on the grounds of economic necessity. Rather she based her proposal to alter the child care deduction on a general perception of social conditions, in this instance the number of women in the work force, and on the applicability of the principle of equity in taxation. In these respects she did not deviate ~_ , _ _ _ _
229 from the President's own rationale for changes in the child care deduction. Neuberger was, however, more direct in her assertion of the principle of equity and of a mother's right to work. In effect she challenged the implicit assumption of the 1954 child care tax provision that a mother's only justification for working was economic necessity. The sentiments of Neuberger and others carried some weight with the Senate Finance Committee. While agreeing with the changes made by the House bill in the child care provision, the Finance Committee found them "too narrow." As a result, the committee followed more closely the administration's recommendations. Their most important amendment raised from $4,500 to $7,000 the income limit applicable to working mothers whose husbands were present. Affirming the original intent of Congress in providing the deduction to working wives--that the maintenance of a minimum standard of living sometimes required that a wife work--the Finance Committee explained that the current higher median income made the $4,500 limitation unreal- istic. It was below the median income of two-parent families in which the wife worked. They concluded that "the $4,500 limitation falls far short of covering the average case where the wife has found it necessary to supplement the husband's income by working."4~ The Finance Committee aided working wives in another way. They made the deduction for each child comparable to that allowed for single-parent families in the House tt~hQ=~ mY-^ncmc - t~ they explained "are as likely Vt:L ~ Evil. · ^~ ~^---r ~ ~ ---a ~ to increase on a per-child basis in the case of a married couple as in those cases where there is only one parent." Moreover, the Senate bill carried the House provision one step further in providing a maximum deduction of $1,000 for three or more eligible dependents. Otherwise it substantially conformed to the House version. Neverthe- less, the changes made by the Finance Committee added $15 million to the estimated revenue loss of the House bill and 200,000 taxpayers to the universe of those eligible. The new totals were $20 million and 444,000 taxpayers. While aligning itself with the administration's position, the Senate bill still skirted the issue of equity. Like the House, the Senate explained that its amendments were necessary updates to the 1954 measure--principally a function of the change in median family income over the decade. Apparently, Congress was neither more comfortable with the idea of mothers working nor more certain of the connection between business and child care expenses.4 2
230 As a result of their differences the two versions went into conference. The final bill was a compromise between the Senate and the House versions. It raised the maximum amount of the deduction from $600 to $900 for eligible taxpayers with two or more children. Congress extended this benefit to all working mothers regardless of the presence or absence of their spouses. In addition, the final bill raised the joint income level, which determined a working wife's eligibility for the deduction, from $4,500 to $6,000. Both these increases were below the recommendations of the administration and the Senate. The law provided a new rule to cover a taxpayer with an incapacitated or institutionalized spouse. Finally, the bill specified the age of a dependent qualified to receive care at 13 rather than 11. In April 1963, with the President's signature, the measure became law.4 3 FROM TAX RELIEF TO "JOB DEVELOPMENT": 1964-1971 Although the revised deduction increased by one third the income limitation and by one half the deductible amount for more than one dependent, the impact was very slight. Comparing the figures before and after the revision in the years for which the data are available (1960 and 1966), households claiming the deduction declined by 7 percent from 272,000 to 254,000. Despite an increase of 27 percent in the dollar amount deducted ($103 million to $131 million), the 1964 reduction in tax rates left the net revenue loss virtually unchanged at $21 million. More households in the $5,000-$10,000 income range took the deduction, fewer in the under-$5,000 group. Nevertheless, the low income ceiling and limit on the amount deductible made the child care deduction of little value in an era of rapidly rising incomes. To deal with this situation, members of Congress introduced 15 bills to increase the amount of the allow- able deduction, 9 to raise the income ceiling, 5 to raise the age of children qualified to receive care, 5 to change child care expenses from a personal to a business deduc- tion, and 2 to remove all restrictions on marital status. Often proposals to raise the amount deductible for child and dependent care expenses also increased the limitation on income. In all, members of Congress proposed approxi- mately 43 bills between 1964 and 1971; many introduced the same bill two or three times. Others simply offered amendments of a general nature. In 1971, for example,
231 two bills "to amend the Internal Revenue Code of 1954 in relation to expenses for the care of certain dependents" had 36 sponsors and cosponsor s.4 4 The impetus for and shape of the proposed revisions came to some extent from organized groups. While intro- ducing a bill to revise the deduction in 1966, Representa- tive Joseph Resnick (D-New York) acknowledged Howard Coughlin, president of the Office and Professional Employees International Union (AFL-CIO), as a "spokesman for thousands of working mothers.' T. I- he'll] in ~ _ ma_ ___ ~ Resnick noted, who had called the attention of Congress to inadequacies in the child care deduction with respect to this group of women and inspired his bill.45 In the course of shaping a new deduction, the American Bar Association also had a direct impact. At one point, for example, Acting Assistant Secretary of the Treasury John Nolan wrote the American Bar Association to observe that "we could convince the conference committee only to go part of the way as urged in your brief with respect to [the deduction]."4 6 In addition, there is evidence that women themselves were organizing around the deduction issue. Judith Viorst organized a group called Working Mothers United for Fair Taxation to lobby for a bill that would "make all necessary and ordinary business-related child care expenses tax deductible regardless of income. tl4 7 Less-organized constituent pressure also had some impact. "[A]s it stands now," Senator Russell Long explained, "when one goes home and talks with his consti- tuents, about half of the working mothers are not getting the benefit of the deduction under present law while half of them are, and a senator must spend half of his time explaining why one-half of the working mothers do not get the benefit of the deduction while the benefit is avail- able for the others." Television programs publicized this issue. A mother on the "Today" show raised a classic example of the tax law's inequity: If David Rockefeller could deduct as a business expense the salary of a secretary, why shouldn't every working mother be able to deduct the cost of hiring someone to take care of her house and children while she was at workers Much of the rationale for enacting amendments to the child and dependent care deduction recapitulated past arguments. Some argued that the hardships of working mothers were not adequately redressed by the 1964 revision. Others pointed to changes in the labor force participation of women and in median incomes to urge
232 revisions to achieve the promised relief to working mothers of both the 1954 and 1964 deductions. This reasoning essentially affirmed the purpose of the child care deduction as a relief measure for those taxpayers whom circumstances compelled to work. On the other hand, a growing aspect of the rationale for amendments to the deduction attributed a very differ- ent meaning to the child and dependent care section. The growing women's liberation movement recast the principle of equity in taxation to include not only equal treatment for all working mothers but also equal treatment for men and women. Men, the traditional breadwinners, had bene- fited the most from the business deduction; for women, whose traditional responsibility was the care of their children, the child care deduction offered a social equivalent. Child care expenses were as "ordinary and necessary" to a working mother as lunches, sales trips, etc., were to a working man. Overall, despite one's particular position, a consensus was slowly developing to eliminate the tax stigma attached to mothers who elected to work voluntarily. Each proponent implicitly agreed that all working mothers, regardless of income or circumstances, should be eligible for the deduction. This new consensus was not without tensions--some of which surfaced in the reports issued by the Citizen's Advisory Council on the Status of Women. Created by executive order as a successor to the President's Commission on the Status of Women, the council was directed to stimulate and evaluate the progress of organi- zations in advancing full participation of women in American life. This included reviewing the recommenda- tions of the President's previous commission with respect to the child and dependent care deduction. As its pre- decessor had done, the council divided its work into task forces: health and welfare, women's rights and responsi- bilities, and social insurance and taxes. The preamble to the report of the health and welfare task force set the tone for the remaining reports. The earlier commission's report "was unduly cautious" given the recent "surge of women into employment." Its findings "must be updated in varying degrees." The task force turned to its primary concern: the continued viability of families at all income levels. To this end the members believed it imperative that women have the fundamental right to decide whether to stay at home and care for their children or to seek employment and delegate child care to others. The task force emphasized this right to choose
233 because of increasing legislative attention to work and training provisions for welfare mothers with preschool children, specifically the Work Incentive Program. "Generalizations," they concluded, "that all needy mothers should work or that no mothers should work are equally untenable." No principle was "more crucial" than ensuring the mother's "right" in both middle- and low-income families to choose "between employment and full-time homemaking. ''49 This task force u1a not make any specked r=~llul`~l~a- tions with respect to the child and dependent care deduc- tion. The issue of choice, however, became central to the council's deliberations. Integral to choice was child care, and inseparable from child care was cost. Two of the task forces assumed very different positions on the nature of choice, child care, and the tax deduc- tion. On one side was the task force on women's rights and responsibilities. Its members stressed federal assistance to middle- and upper-income groups. They recommended that child and dependent care expenses including amounts paid to a housekeeper, nurse, or institution should be deductible. They explained that categorizing child care as a business deduction would help low-income families, who could not afford to itemize deductions on their tax returns. Such a change would also remove the income limitation and open the deduction to higher-income families. "There seems," the task force's report concluded, "to be no good reason for limiting the deduction to low-income husband-wife families."50 Another approach to strengthening a woman's right to work was recommended by the task force on social insurance and taxes. Its report suggested that Section 214 be phased out. Rather than lose revenue through the deduc- tion, the federal government should use these revenues to develop day care and other human service programs. The task force members based their recommendations on the deduction's ineffectiveness as a relief provision for low- income women and others in need. They found that women in families with incomes under $6,000, particularly those with several children, had little money available for child care. In low-income families the mother was more likely to care for her child while working. By contrast, in higher-income families, the mother frequently worked only during the child's school hours or employed a house- keeper to do housework and care for the children. Low- income families with many children received little or no
234 benefit from the child care deduction because their exemp- tions and deductions exceeded their income. Moreover, for those families who did have sufficient income to benefit, the value of the $600 or $900 deduction was but a small part of the total cost of even the simplest type of child care. The $600 deduction was worth only $84 for a tax- payer in a 14 percent income bracket and $120 for one in a 20-percent bracket.5~ In its report task force members extended their analysis of the effect on the deduction on low-income families. The number of taxpayers filing the deduction for child and dependent care expenses in 1966 revealed a decrease in the deduction's utility to low-income families. In 1960, 182,552 taxpayers with adjusted gross incomes under $5,000 claimed the deduction. Six years later only 99,151 taxpayers in this bracket claimed the deduction. In contrast, from 1960 to 1966 taxpayers with adjusted gross incomes over $5,000 increased their use of the deduction: 50,000 more taxpayers in the $5,000- $10,000 range claimed the deduction in 1966 than in 1960. Similarly, 1,400 more taxpayers with adjusted gross incomes of $10,000 or more took the deduction in 1966. The total number of returns claiming the deduction declined by 6.5 percent over these years.5 2 In light of the deduction's deficiencies, the social insurance and taxes task force carefully examined the possible effects of the amendments pending in the 90th Congress. Removing the income limitation on married women might divert attention from the question of higher salaries for women. "The significance of the benefits of such a deduction to the individual nurse, teacher, or social worker," they warned, "might well be exaggerated in the minds of the general public and of those who fix salary scales." In addition, removal of the limitation would help professional women defray the cost of their children's care, but give little or no help to service workers and other nonprofessional female workers with child care needs. Task force members criticized amend- ments that sought to make the deduction a tax relief measure for middle- and upper-income families. "Proposed revisions," they stated, "could result in significant revenue costs to the government while giving little help to the large proportion of working mothers who cannot afford to spend such amounts." Their report concluded that the present deduction is neither effective in giving assistance where it is most needed nor in encouraging better care of children of working mothers." The
235 proposed changes would "simply provide tax relief to those families able to make expenditures for care of children and disabled dependents."5 3 The task force took a firm position that it was the government's obligation to provide relief in cases of hardship. In this respect they supported a woman's right to choose between formal employment and the maintenance of her own household. They believed that federal aid to low income mothers created new options for those women and were willing to sacrifice the deduction as a middle- income subsidy to offer more of a choice to the poor. By refusing to extend to middle- and upper-income mothers the benefits of a choice-enlarging deduction, the task force implicitly confronted the large segment of the women's liberation movement representing professional women. Speaking for this segment of the movement, lawyer Grace Blumberg attacked the task force's position in an article on "sexism in the tax code." "While the Task Force's consideration for the poor is commendable," she intoned, "it is beside the point. Section 214 involves two discrete problems: the cost of earning income (and implicitly, the work disincentive arising from disallow- ance of a deduction for a necessary expense) and hardship for low-income two-earner families." =] ·`m~^r~ -^nr] Ad D ~ MOWN ~ - ___ that the "problem of the poor is an entirely separate problem. It is not a valid objection to a provision designed to allow deduction of business-related expenses that the poor will not benefit from it."5 4 None of the recommendations of the task force were formally discussed by legislators. Nevertheless, the ideas and tensions of the various task forces concerning the proper purpose and direction of the deduction per- sisted in Congress. Few legislators articulated the specific explanations for the bills they introduced, but several rationales were apparently operative. Some members of Congress, who proposed an increase in deduct- ible expenses, undoubtedly felt that present limits were inadequate. The deduction was an insufficient incentive for low-income mothers with many children to make use of child care opportunities. Others believed that the amount expended by middle-income mothers exceeded the present deduction limit. The deduction was inadequate compen- sation for these women. Chairman Russell Long of the Senate Finance Committee proposed a bill, the Child Care Services Act of 1971, which represented an amalgam of divergent interests concerned with the child care deduction.55
236 Revision of the deduction had come to the Senate Finance Committee's attention in the House-passed version of the Nixon administration's Family Assistance Plan (FAP). The FAP had a substantial child care provision of $700 million in federally funded child care for welfare recipients. It allowed an additional $50 million for alteration and construction grants to create new care facilities. The FAP stressed child care as a work incentive. It changed the child and dependent care deduction to liberalize the maximum income tax deduction from $600 to $750 for one child, $900 to $1,125 for two children, and $900 to $1,500 for three or more children. Families with incomes up to $12,000 would be eligible to take the deductions 6 In his bill Long separated the revised Section 214 from the FAP and amended its provisions by increasing the deductible expenses from $600 to $1000 for one child and from $900 to $1,500 for more than one child. He raised the limitation on an eligible family income from $6,000 to $12,000 and changed the marginal reduction in the deduction from dollar for dollar above the $12,000 income limitation to 50¢ per dollar. "The key feature of my bill," he told the Senate, "will provide greater tax relief for the lower or middle income working woman who needs child care services in order to work." His bill had many other features relating to child care, most of which were directed toward expanding the availability and the variety of child care services. He was concerned that lack of child care services prevented many mothers from obtaining jobs. "There are few who would disagree," he asserted, "that the lack of availability of adequate child care today represents perhaps the greatest single obstacle in the efforts of poor families, especially those headed by a mother, to work their way out of poverty." Long was careful to add that middle-class mothers as well were prevented from working. With the exception of the child care deduction, however, all of the provisions in his child care services bill were targeted solely for welfare recipients and low-income working women.5 7 The Finance Committee used Long's bill as a vehicle to overhaul the entire deduction. They incorporated the deduction into the Revenue Act of 1971 and renamed it the "job development deduction" for household services and child care. "The Committee has amended the bill," their report explained, "to provide a new job development deduction which is designed both to encourage the employ
237 ment of individuals in child care and domestic service and to relieve hardship in certain cases where substantial Dyers "Yn~n=~ are incurred for such purposes." The revised bill included provisions that allowed a single working parent maintaining a household and a dependent under 15 years of age to deduct up to $400 a month for household services including those unrelate to child care. If child care were purchased outside the home, an eligible taxpayer could deduct $200 for one child, $300 for two children, and $400 for three or more. In families in which both parents worked, their total income could not exceed $12,000 in order for them to benefit fully from the deduction. Individuals maintaining households for themselves or for disabled dependents were also eligible for the deduction of household expenses. The committee pointed to several major needs addressed by the deduction. First, it would "give large numbers of individuals who are now receiving public assistance the opportunity to perform socially desirable services in [household and child care] jobs which are vitally needed." Deduction of household services was also justified by the original language of the 1954 measure. In certain families both parents required help not only with child care, but household chores as well. "The domestic help is needed in these cases because the adult members of the family are employed full time and in this sense the domestic help expenses can . . . be likened to an employee business expense." Second, the deduction would relieve hardship by helping to pay the "substantial extra expenses" that a single parent or parent with a disabled spouse incurred. Finally, in its liberalization of the income limitation for married couples and the inclusion of expenses for household services as legitimate deduc- tions, the committee lightened the tax burden of two- earner families. The estimated revenue loss was $110 million in 1972 and $115 million in 1973.59 When the bill came to the floor, several senators proposed amendments to better what they already con- sidered a good tax deduction. Senator John Tunney argued that child and dependent care expenses should be allowed as a business deduction. Furthermore, it would make the deduction available to those families that did not itemize their tax returns. Tunney pointed out that almost 70 percent of families with incomes under $10,000 took the standard deduction. Thus, the amendment would provide relief to more taxpayers in need. Long supported the amendment precisely because it would give relief to more J
238 working mothers. In drafting the bill, he explained, the committee had estimated its cost at $300 million. The final estimate of cost was less than half this figure because many taxpayers in the lower income ranges did not itemize their returns. Long maintained that Tunney's amendment merely improved on what the Finance Committee and he himself had intended.60 Twelve other senators cosponsored Tunney's amendment. Only Senator Wallace Bennett expressed any opposition to the change. "We are tossing money around here pretty freely," he noted. "[I] wonder when we will reach the point where we consider that we must be responsible as well as generous." Senator John Pastore was quick to respond: "Every time we talk about little children and retarded children, we start to talk about how much money we will toss away." Tunney's amendment passed by a vote of 74 to 1.6~ On November 15, 1971, three days after the child and dependent care deduction had been transformed into a business deduction for job development, Tunney offered a second amendment to the bill. The amendment proposed to increase from $12,000 to $18,000 the point at which the deduction for expenses of child care and household - services was incrementally reduced for married couples. He argued that, since child care and domestic help are work-related, they should be considered as business expenses for families regardless of income level. Tunney saw no reason to limit eligibility for the deduction to families at or below the median income level "when we are talking about work-related activities." Moreover, families in the middle-income range face large tax burdens. Federal, state, and local taxes consumed 16.7 percent of the income of families earning between $8,000 and $10,000 while taking 21.1 percent of the income of families earning between $15,000 and $25,999. "[We] ought" he insisted, "to have some additional form of tax relief for families with incomes between $12,000 and $18,000--particularly when that form of tax relief would allow a mother to work, and at the same time . . . give work to a babysitter. 6 2 Long agreed fully that middle-income families merited whatever tax relief the deduction could provide. "I personally think," he drawled, "we should do more for people who hire someone to do domestic work than we are doing in this bill." He reaffirmed the deduction's two major benefits: first to "a working woman by permitting her to employ someone to help with domestic duties and
239 help look after her children; and second, [to] the people who are being employed. The latter "are able to earn enought to make their own way, or . . . supplement their welfare payments so that the family, too, can live a little better." And, of course, "Uncle Sam saves money in the process. ·~6 3 Bennett again raised objections to amending the bill. He felt that it was not "necessary" for women from families earning up to $27,000 (the income level at which the deduction phased out completely) to work, and the federal government had no business providing them with any kind of tax relief. His point was that unless the amendment further alleviated the child care problem of low-income mothers, it had no legitimate purpose. He punctuated his objections with an appeal to his fellow legislators' sense of motherhood. How could they support _ , _ _ a measure that would encourage middle-income taxpayers to "pass off the motherly duty of childrearing to an employee"?6 4 Tunney and Long responded to Bennett's criticism by stressing the idea that child care and household expenses were business expenses. The only distinction, Tunney quipped, was that in the first instance women were involved, in the other the expenses were incurred principally by men. Long told Bennett that his "idea that a woman's place is in the home . . . is no longer current. Rather, it is recognized as a right of women to [work]." Long concluded that "the women's liberation movement has caught on." This line of defense, however, did not speak to the problem of how Tunney's amendment would further ease the child care problems of low-income women. Long admitted that the impact of the dedution was greater at higher levels of income. Nevertheless, he believed that the deduction's ability to create unskilled jobs and help reduce the welfare burdens compensated for its bias against low-income families. Such a justifica- tion seemed satisfactory to other senators as well, as Tunney's second amendment passed by a vote of 59 to 24 ·6 5 The Tunney-Long amendment changed one of the central purposes of the deduction to the employment of low-income and welfare mothers rather than the relief of child care expenses they incurred in working. Tunney's amendments also came closer to a second, implicit purpose of the deduction: that all mothers should be allowed the choice of working and the costs for care of their children should be legitimate business expenses. His amendments transformed a tax deduction based on hardship into one
240 based on equity for working mothers regardless of economic hardship. Much had changed since the last revision in 1964. There were several categorical day care programs for the poor. Women's liberation and inflationary pressures on real incomes had made mothers who worked more prevalent. The FAP and the child development legislation were still pending with large child care programs for low-income families. These changes in the deduction offered benefits to middle-income groups and satisfied a constituency politically active and often neglected in federal efforts on behalf of the poor and needy .6 6 The Treasury Department's response to Tunney's amend- ments was less than enthusiastic. "We do not believe," the Office of Tax Analysis stated, "that an incentive for domestic service meets a national need which deserves the priority it is receiving in this legislation." Questions arose over the deduction's ability to expand the domestic work force. One analysis calculated that the proportion of families in the $20,000-$25,000 income range eligible to use the deduction under Tunney's amendment might employ an additional 50,000 domestics. This increase, the analysis concluded, was not enough to compensate for the revenue loss of the bill. In addition, the deduction opened opportunities for individuals on welfare in dead- end jobs, thus undermining the usual objective of federal programs to place welfare recipients in promising occupations .6 7 The department also objected to Tunney's amendment to raise the income limitation of married couples on the grounds that the government should not subsidize dependent care expenses when the family had the means to pay for such care. It recommended that income limits apply to single taxpayers as well as to married couples. The department concurred with the task force on social insur- ance and taxes that the amended deduction offered no real benefits to "the individuals who are most in need of relief." Since low-income families often could not afford to pay for child care and paid little or no taxes anyway, the deduction was meaningless to them. The deducted income would be better taxed, then allocated directly to support child care centers to provide services to working families at little or no cost.68 Finally the department objected to the equation of child care and business expenses. Child care is personal in nature; it is "the legal obligation of all parents" that must be met irrespective of whether one, both, or
241 neither parent works. "In the absence of statutory authority," it noted, "child care expenses are not deductible as business expenses because in a tax system which taxes income they are not directly related to the production of income n . In sum, the Treasury recommended that the Senate's bill be changed to reduce the revenue loss from $315 million to $100 million. The department suggested that child care and dependent care expenses remain an itemized deduction, that the income limitation for married taxpayers be set at $12,000, and that the income limitation be established for single taxpayers. Treasury also suggested limiting qualified expenses to those incurred primarily and directly for the care of dependents that did not exceed the earnings of a household's lowest-paid taxpayer. The department estimated that these changes would reduce the revenue loss by $215 million.69 It befell the conference committee to resolve the differences among the House, Senate, and Treasury desires for the deduction. In conference the members substan- tially retained the Senate's version. They did not, however, allow the deduction "above line" and thus made taxpayers electing the standard deduction ineligible. The conference accepted a maximum deduction of $400 per month for in-home child care and housekeeping expenses. Out-of-home care expenses were graduated: $200 per month for one child, $300 for two, and $400 for three or more. It imposed the same $18,000 income ceiling on single parents as on married couples with an incremental phase out of 50 cents per dollar for incomes over the ceiling. Children up to the age of 15 became eligible, but payments to a relative of the taxpayer still did not qualify as deductible expenses. It clarified the meaning of household services to guard against possible abuses. Such services were not to include those persons func- tioning principally as gardeners, chauffeurs, or bar- tenders. In addition, a taxpayer had to be employed "on a substantially full-time basis" in order to be eligible to deduct service expenses. Finally, the conference devised a complicated formula to calculate the portion of disability payments applicable to the care of disabled dependents.70 On December 10, 1971, President Nixon signed the Revenue Act of 1971 into law. The child and dependent care deduction ceased to be a relief measure for low-income families and became instead a child care subsidy for working mothers in middle- and upper-income brackets. Barely two weeks later the same President
242 vetoed the comprehensive child care bill in part to preclude any "sovietizing" of middle-class children through nonmaternal care. FROM TAX DEDUCTION TO TAX CREDIT: 1971-1978 Passage of the 1971 deduction brought an unprecedented outpouring of criticism from lawyers and economists. They found that the inclusion of housekeeping expenses in the deductible amount for households with children whose parents worked discriminated against households without children in similar circumstances. Both types of house- holds had an equal claim to a deduction for housekeeping expenses. "Equity between childless couples and couples with children," one piece surmised, "is lost as long as the household service deduction is available only to the latter." Scholarly critics also asserted that the deduc- tion excluded most low-income and many middle-income households that did not itemize on their returns. More- over, it discriminated against otherwise qualified part- time workers, students, and vocational trainees who were ineligible. Finally, the critics assailed the deduction's failure to include payments to relatives for child care services as allowable expenses. This failure further limited the ability of the poor to deduct their care expenses and unjustifiably restricted a taxpayer's choice of employees.7~ Academic analysis of the deduction was virtually unknown prior to the 1971 revision. In part its advent reflects the growth in the dollar amount of the deduction from $221 million in 1970 to $1.1 billion in 1972 and $1.3 billion in 1973; the number of households claiming the deduction tripled to 1.6 million. The increased income level also moved it more into the purview of tax lawyers and accountants serving higher-income taxpayers. In part, too, the specificity of these analyses attest to a change in attitudes toward working mothers. Their narrow focus betrays a subtle but profound transformation . In perception: .~ ..~ .. =~ Work ina mothers In Particular and working women in general had become socially acceptable. The issues now involved the less cosmic concerns of equity across income classes and occupational pursuits. Broad social policy designs and ideological appeals, so prevalent in previous years, were becoming mute. Despite numerous arguments based on "equity," this guiding principle of the overall tax system is to some extent irrelevant to the enactment of specific provisions .
243 One might argue instead that the provisions are essen- tially the artifacts of those interests and ideologies victorious in the legislative decision-making process. Perhaps the changes in the power of women's lobbies and public mores better explain the incorporation of the child care deduction into the tax code and its subsequent vicissitudes than any growth in forensic enlightenment. Arguments for and against the deduction were still couched in concepts of equity, business expenses, personal expenses, etc.; this is the language of the tax policy- making process. These arguments, however, were perhaps merely overlays on a shifting political and social landscape whose changes molded tax policy. In an article in Single Parent magazine, the leading proponent of a more liberal deduction, John Tunney, appears to substantiate this observation. He began his article by labeling the deduction a "discriminatory tax on single parents and working mothers who are making an effort to provide for themselves and their families." The tax structure, he continued, had failed "to respond to the changing realities of the times." The tax laws had not been written to take account of working mothers or fathers in single-parent families. Their numbers had not been "significant" and they had not yet organized "to make their presence felt." Since 68 percent of the families earning $10,000 or less use the standard deduc- tion form, these families "who most need and deserve assistance from tax relief" did not receive the benefit of the child care deduction. "This is," he believed, "an inequity which must be removed." - --~~ ~~ ~ "~^~~^~~' _ 1 L Wd:~ LIVE ~ ~ main ~ expense" to make "sure your child is safe while you are away all day earning enough to keep your family together. lt7 2 In proposing to make child care expenses a business adjustment Tunney showed his concern for all working mothers r not only those who were in some way needy. He believed that subsuming child care under business expenses was a step toward equalizing the labor market conditions of men and women. He insisted that this "unnecessary and unjustifiable obstacle in the path of women who wish to enter the employment market" was not the result of "any positive attempt to discriminate against women." Rather, he suggested, it was a "relic of a time when it was not the normal or accepted thing for mothers to go out to work." In advocating his amendment to the deduction, he affirmed that times had changed, that all working mothers needed this help, and, finally, that the Senate in general
244 and John Tunney in particular were in step with the women's liberation movement.7 3 Tunney had a great deal of support from other senators. In February 1972 he introduced a bill to allow the deduction of child care payments as business expenses; 23 senators volunteered to cosponsor the measure. In October, however, when he resubmitted the bill for Senate consideration in connection with H.R. 1, Senator Bennett again came forward with objections. Bennett asserted that the bill "is so loosely drawn that if a rich woman had a maid and is making a fine living writing books, she can decide that she can deduct all of her household expenses." For Bennett, the allowance of "ordinary and necessary expenses" in this context created a massive loophole. If a mother "is presiding over a household with half a dozen servants, to her those may be ordinary and necessary expenses. There is not a thing here about child care." Bennett retained the idea that the child care deduction was only legitimate as a hardship provi- sion. Changing the deduction into an "above-line" item would effectively remove the $18,000 income ceiling and extend benefits to individuals who, he believed, did not need them.7 4 Despite Bennett's objections, Tunney's amendment passed the Senate by 71 to 8. However, it encountered strong opposition from the Treasury Department for many of the same reasons that they had opposed the 1971 revision. Child care, the department insisted, was a personal obligation of all parents and, thus, a personal expense. Removing the income limitation "would generally benefit only taxpayers in higher income levels who can most afford to pay others to perform the household and dependent care services which others must . . . perform themselves." This effect ran against the basic hardship justification for the deduction. The Treasury suggested that the $200 million in lost revenue would better aid the low-income taxpayer as a categorical child care program than as a tax deduction: 80 percent of the deduction's benefits would accrue to families earning over $15,000 per year. Finally, to avoid abuses by parents working part-time and still able to provide care for their children, the department opposed dropping the full-time employment restriction in Section 214. The Treasury's position prevailed and Tunney's amendment was deleted in conference.75 Defeat did not dampen efforts to restructure the deduction. Over a dozen bills were introduced in the
245 House and Senate during the following three years. In general they sought three changes in the provision: to allow full-time students and part-time workers the deduc- tion, to make payments to relatives for child care deduct- ible, and the perennial proposal to subsume child care costs under business expenses. The Treasury Department, too, was working on changing the structure of the deduc- tion. The department had discovered several administra- tive difficulties with the current law. Under the rubric of simplification it proposed to eliminate three of the most complex elements: the distinction between in-home and out-of-home care, the requirement of a monthly calcu- lation of expenses, and the disability income formula for reducing the allowable deduction.7 6 In response to the continued congressional proposals and the Treasury's administrative concerns, the staffs of the Joint Committee on Taxation and the Office of Tax Policy met to work out a set of revisions in drafting a 1974 tax reform measure. Under Laurence N. Woodworth, the committee's chief of staff, participants took up Treasury's proposals and the many congressional bills involving the deduction. Treasury had explained their suggestions for revision: an annual $4,800 ceiling on the deduction, regardless of the number of dependents, abolition of the distinction between in-home and out-of- home care, limitation of the deductible amount to the income of the "lesser compensated" spouse, elimination of the disability income adjustment, and a dollar for dollar phase-out of the deduction for taxpayers earning over $22,000 per year.77 _ . . ~ Woodworth agreed with most of the Treasury's proposals and the Ways and Means Committee agreed with Woodworth. By late spring 1974 they had drafted a bill incorporating all of the department's major proposals. In addition, the committee changed the maximum deduction from a flat $4,800 to $2,400 for one dependent and $4,800 for two or more. The committee allowed full-time students and part-time workers to take the deduction. The latter group was subject to the "lesser compensated" spouse rule. This rule eliminated objections that allowing a part-time worker the deduction might open it to undetectable abuses: deducting $4,000 worth of child care to earn $2,000 in income. Deserted spouses were allowed the deduction after 6 months instead of a year. In cases of divorce or separation, the spouse maintaining the depen- dent's household was allowed the deduction regardless of who claimed the dependent as an exemption. Finally, the
246 income limit was raised to $30,000--$8,000 above the Treasury's recommendation.78 Although the bill incorporated several of the revisions suggested by members of Congress, there were two significant exclusions: changing dependent care expenses to a business deduction and allowing payments to relatives for care as deductible expenses. "The principal reason," a Joint Committee on Taxation memorandum stated, "for not permitting the deduction as a business expense is that it is viewed by the committee, the Treasury Department, and others as partly a personal expense." The income limit was an expression of its character as a personal expense since child care "is not quite as 'necessary' [at high levels] as it is at lower levels of income." The memorandum concluded that the deduction still retained the hue of a "tax relief measure for widows and low-income married couples. 8'79 The Treasury Department and Joint Committee staffs also resisted any deduction for payments to relatives. Here the issue was the possibility of abuse by taxpayers. To one representative advocating such a measure, Woodworth explained that it "would be difficult, if not impossible, to verify whether payments to another family member . . were actually made . . . [and] whether these payments were for a legitimate, deductible service or merely represented a gift or transfer of income from one family member to another." Even if the relative reported the payments as income, he might not have sufficient total income to be subject to tax. Moreover, Woodworth rejected the idea that this revision "would increase the avail- ability of child care services." Relatives receiving payments "would probably care for the children even if there were no payment or deduction."~° Ways and Means reported out their tax reform bill with a limited revision of the child care deduction in December 1974. Several events, however, intervened and the bill never reached the floor. Wilbur Mills, the long- standing pillar of tax legislation, had fallen victim to alcoholism and puerile scandal. Without Mills, the Ways and Means Committee lost its unequaled authority over tax legislation. Long-time liberal foes of Mills convinced the House Democratic caucus to strip Ways and Means of its control over House committee assignments, increase its membership by half, and make MillS'S position as chairman untenable. His removal and the new class of liberal freshmen (artifacts of the November "Watergate" election) gave tax reform proponents reason to believe .
247 that they could restructure the present committee into one more akin to their views. On the grounds that there was insufficient time for deliberation before adjournment the House Rules Committee refused to rule the bill to the floor. As a first order of business, the 94th Congress took up the matter of tax reduction. In the trough of the worst recession since the 1930s President Ford had proposed and the Congress quickly enacted a $23 billion tax cut. Barely a month into the session, Ways and Means Committee reported a bill to reduce taxes by $20 billion. In their haste they failed to include any measure revising the child care deduction. The House-passed bill reached the Senate Finance Committee in March. On the floor Tunney again offered a bill to change the deduction into a business adjustment to gross income and allow a deduc- tion for payments to relatives. Russell Long, however, persuaded Tunney to hold his measure until the Finance Committee reported the House bill and then introduce a modified version as amendment to the final bill.8 2 Presented during the Senate debate over the Finance Committee bill, this modified version consisted essen- tially of Tunney's earlier proposal plus a provision offering an optional tax credit ~ for child care expenses. A qualified taxpayer could elect to deduct child care expenses from gross income as a business adjustment or to credit 50 percent of those expenses up to $600 directly against the tax liability. After introducing his revised amendment, Tunney yielded the floor to Long. A consistent advocate of "workfare" over welfare, Long defended the credit as "especially helpful to a mother drawing welfare payments who would like to go to work to improve the condition of her little family." The tax credit, he continued, "would cover about half the cost of providing decent day care for her child while she . . ~ tries to provide for a better situation in life for both herself and the child." Long added that the credit accorded well with the new earned income credit in making "honest endeavor, honest work, more attractive than welfare." Only Senator Carl Curtis objected to the Tunney-Long amendment. Significantly, his objection did not extend to the question of working mothers and nonmaternal child care; he simply opposed the potential $1.7 billion in lost revenues. Despite his reservations, the amendment easily passed the Senate.3 3 The question of revenue loss, however, resurfaced in the House-Senate conference. The Senate version of the
248 tax cut added $10 billion to the House bill--$1.7 billion of which was contained in the child care deduction/credit. The deduction/credit would increase by sixfold revenue loss through the current deduction. Potentially, every dollar expended for child care would be exempt from federal income tax; business expenses had no restrictions on income eligibility or ceilings on deductible amounts. House conferees from Ways and Means balked at the magni- tude of the Senate's tax cuts. For the same reasons they had declined in 1974, House members refused to make the child care deduction either a business expense or a credit. The sole change in the existing deduction they agreed to was an increase in the income ceiling to $35,000. This revision reduced the revenue loss from $1.7 billion to $100 million. on March 29, 1975.8 4 Ford approved the measure Despite defeat of the tax credit, proponents believed that they had discovered a method of expanding the child care deduction without running afoul of Treasury and Ways and Means. The credit offered the great advantage of a business adjustment: an itemized return was unnecessary to claim it. Yet, unlike the business adjustment, pro- ponents argued that the credit provided proportionally greater tax credit relief to lower-income groups and circumvented the personal versus business expense debate over the deduction. The credit also simplified Section 214 by replacing the income ceiling and the monthly limitation on deductible expenses with a maximum dollar amount. In September 1975 the Ways and Means Committee began considering the credit as well as an extension of the deduction to full-time students and part-time workers up to the amount of their earnings and elimination of the distinction between in-home and out-of-home care. In committee three members assumed the lead in substi tuting the credit for the deduction: James Corman, Martha Keys, and her husband, Andrew Jacobs. In this Congress Ways and Means was a very different committee than it had been previously. A larger membership, several subcom- mittees and, above all, the willingness of members to appeal committee decisions to the Democratic caucus served to loosen the grip of the chairman and conser- vative members on the purse strings. Corman took advantage of these changes and the inherent attractive- ness of the revision to move for substitution of the child care deduction with a 15 percent credit of care expenses up to $300 for one child and $600 for two or more. It was adopted 19 to 13. Keys wanted a higher
249 credit, but the revenue loss precluded any credit near the Senate's 50 percent level. Such a credit simply had no chance in committee. ~ ~ She did, however, manage co persuade a majority of committee members to raise the credit to 20 percent of care expenses up to $2,000 for one child and $4,000 for two or more, a maximum credit of $400 and $800, respectively. She and Chairman Ullman agreed on a day when her amendment would be considered.B5 . In his rush to complete action on the overall tax bill and to minimize changes, Ullman brought up the Keys amend- ment earlier than he had promised. With several of its supporters absent, her amendment was defeated 17 to 12. Angered by their tactical defeat, liberals on the commit- tee sought to illustrate the inequities of the committee's decisions on the bill. Jacobs arranged a little visual drama with the assistance of a staff member's two chil- dren. On the same day the committee had scuttled the Keys amendment, they had approved a generous provision for oil corporations. Jacobs costumed the children as oil wells and led them into the committee room. "If they look like oil wells," he explained to his colleagues, "perhaps they will be treated like oil wells." Although a few members protested that the dignity of the committee had been trod upon, the point had been made effectively to others. In the earlier vote several supporters recognized their imminent defeat. Under committee rules a motion to reconsider could be granted any defeated measure, if that motion were made by a member voting with the majority. A few, therefore, voted against the amendment. When all the measure's advocates were present, Corman, a supporter who had voted against the amendment, moved to reconsider the Keys amendment. This time the committee adopted it by voice vote. Its passage reflected the basic appeal of the credit to the majority as a measure of the tax equity Ann = ; mollification. Passage was also eased by the enhanced power of the House over decision making in Ways and Means and the presence of media representatives at mark-up sessions. Open sessions made opposition to popular tax measures, such as the child care credit, politically much more difficult.8 6 The committee also approved other changes in Section 214, including the ones related to students, part-time workers, and in-home and out-of-home care. They followed the earlier Tunney-Long proposal to allow a credit for payments to relatives who were not dependents of the taxpayers, who did not live in the taxpayer's home, and ~ ~ ~ ~ .
250 "whose services constitute employment for Social Security purposes." Committee members believed that relatives often provided better care for children and a tax dis- incentive in this regard discriminated against low-income taxpayers who frequently employed relatives as care givers. Moreover, the qualifying provisions lessened the possibility of abuse. In December 1975 the House approved the entire tax bill--a 674-page tome of which 3 pages comprised the child care credit. The House version then went to the Senate Finance Committee. The committee heard testimony and reworked the tax bill for the next 7 months. During this time the Treasury Department and Senator Edward Kennedy advanced major proposals to revise the new child care credit.8 7 Treasury Secretary William Simon testified against transforming the deduction into a credit without any income ceiling. Though the department approved simplification of the deduction, the "high cost for the child care credit is entirely unjustified in terms of the resultant benefits." Simon insisted that the deduction be available "only to low- and moderate-income taxpayers whose economic situation compels both spouses to work. n There was simply "no justification for allowing the tax to subsidize high-income taxpayers in discharging a personal obligation." - ~ somewhat ambivalent: it supported the 'is~mplitying'' amendments but opposed the credit. It opposed extension of the tax break to higher-income groups but supported continuing the itemized deduction. Initially, Treasury wanted to cut the $358 million revenue loss entailed in the credit. It shifted ground, however, to confront the greater revenue threat of Kennedy's proposal to make the credit refundable. B ~ In his testimony before the Finance Committee on the tax bill, Kennedy suggested that the credit be made refundable in keeping with the earned income credit. To contain the additional revenue loss of $35 million he proposed to reinstate the $18,000 income ceiling with a gradual phase-out to $27,000. The "poverty level families who incur child care expenses to work would [then] be eligible for the credit. n His proposal was not brought up in the Finance Committee mark-up. Other than removing the House requirement that a relative caring for a dependent not be a member of the taxpayer's household, the Finance Committee had let stand the House version of the credit. Kennedy again offered his refundability amendment on the Senate floor. Calling it "an extremely important work incentive," he defended refundability as a The department's position was
251 benefit to low-income ($5,000-$7,000) families, particu- larly "the larger numbers of women represented in lower income brackets." Kennedy recited statistics on the number of single women with young children working in very low-paying jobs. He said that he was "building upon" Long's "brainchild," the refundable earned income credit. Graciously, Long offered his support: "there is no way on God's green Earth that we can consistently argue against the amendment. ·~8 9 Senator James Allen, however, found any credit dis- tasteful, and a refundable one noxious: credits "eat up the tax liability"; refundable ones were tantamount to "putting an expensive social program in the tax laws [which] would more properly be the subject of some added social program." He warned against mixing social programs and taxation. In response Kennedy restated the amend- ment's role in helping "working mothers" otherwise inelig- ible for tax benefits. Long took up Allen's charge that the tax system was no place for a social program: "Some- times we can use the tax system to bring about a good result and sometimes we can use the appropriations system better. We should use whatever is more appropriate at the time." Majority leader Mike Mansfield "did not see how we can differentiate between taxes and social programs[;] . . . they complement each other." He described Kennedy's statistics on the low incomes of single working mothers as "startling" and "disheartening." He commended Kennedy's amendment to the Senate; it passed 71 to 21.9° The Senate's final version of the tax was three times the size of the House's original measure--the longest tax bill to pass the Senate in 20 years. By the time the bill went into conference Treasury had acquiesced in the child care credit without an income ceiling, but did oppose the refundability provision. This provision had "nothing to do with the determination of tax liability; it is simply an addition to the tax system which more properly serves a welfare function." ~~ Otherwise the credit was "good" and ~significant." Since child care "may be considered a cost "of earning income," the credit "performs a legitimate tax function" in determining tax liability. ferees concurred in the Treasury's assessment. They deleted the refundability provision to avoid integrating a "social program" into the tax code and to curb revenue losses. They did retain the Senate's amendment allowing the credit for payments to relatives who were residents of the taxpayer's household. The provision that such The House con
252 relatives be employees for social security purposes was also retained. With Ford's signature the tax bill became law in October 1976.9~ Although designed to aid low-income groups, Treasury's prediction of a windfall for upper-income groups better described the effect of the credit without any income ceiling. Households earning under $5,000 claimed the credit at three times the rate they claimed the deduction In this income group returns claiming tax benefits for child care rose from 8,000 in 1975 to 27,000 in 1976 and tax savings from $1 million to $3 million. For middle- income groups, earning $5,000 to $20,000, the credit made little difference. Between 1975 and 1976 the number of returns from these groups increased by 10 percent and the tax savings by 3 percent. The big winners, however, were those households with incomes over $20,000. Restricted in 1975 by the $35,000 ceiling, only 134,000 households in this group claimed the deduction for a tax savings of $24 million. Under the credit households earning over $20,000 increased their use of the tax benefit sevenfold to 954,000 returns, for a tax savings of $196 million--an eightfold increase. Indeed, 83 percent of the increase in households claiming the benefit and 94 percent of the additional tax savings were accounted for by families earning over $20,000 per year. Even if the credit had been made refundable, households earning over $20,000 would still have accounted for four fifths of the total income transfer. _ -- credit with no income ceiling was nearly 20 times more beneficial in terms of income transfer to this income group than was raising the income ceiling to $35,000.9 2 Part of the reason for this distribution pattern is the distribution of tax liability across income classes. In 1975 the median income of all taxpayers was $8,900. Those below the median accounted for only 7 percent of all income taxes paid. The upper 10 percent of taxpayers had incomes over $23,400 and paid 49 percent of all income taxes. In this respect the distribution of tax liabilities biases any tax benefit toward upper-income groups. Moreover, they generally pay more for their child care and thus have larger expenses to reduce their tax liability. Still, there remains a certain paradox between what many of the credit's proponents believed they were doing to aid low- and middle-income groups and what actually resulted from the revision. One possible explanation is that the proponents were deliberately dressing up a loophole as an aid to the . Converting the deduction to a 20 percent
253 middle- and low-income taxpayers. In this case, one would then have to assume that the members of Congress were dissembling (and continued to do so in subsequent years). The more probable explanation involves a complex mix of the structure of staff research, the complexity of the tax legislation, and their intuitive sense of the credit's impact. For every proposed change in the tax code, staff of the Joint Committee on Taxation and the Treasury Department calculate the revenue impact and distribution of benefits. These calculations cover numerous major proposals and nuances. The sheer quantity of data combined with the complexity of tax legislation itself results in most members of Congress dealing only with "bottom line" figures, the total revenue loss of a provision. The problem, one Treasury staffer notes, is "informational overload." This surfeit of information might cause a legislator to use an intuitive sense of a measure's impact. A member of Congress simply sensed that a child care credit, particularly a refundable one, would benefit low- and middle-income families more than a deduction with a high income ceiling. That this was not the case eluded most decision makers outside the Treasury and the tax committee staff. Treasury opposed the credit's benefits to high- income groups, but the department's greater institutional concern was restraining aggregate revenue losses, not tailoring every aspect of each provision in a 2,000-page tax bill. Moreover, unlike other legislation, the administration possesses no real veto unread; c=^ ~ ~ ~ '= represent too many compromises and too much negotiation for that. The department would rather turn back attempts to make structural changes in the tax code, such as a refundable credit, and follow the politically popular route of concurring in a tax break for upper-income groups under the guise of a benefit to low- and middle- income groups. Among relevant decision makers in Congress this route was also easier. Only Kennedy offered the refundability-income ceiling trade-off, and even he dropped the idea of a ceiling in his -floor amendment. Since its passage, the only significant change in the child care credit has been to abolish the clause on employment for social security purposes in determining the eligibility of payments to relatives. Designed to avoid abuse of the credit through unverifiable intrafamily income transfers, the effect of the clause was to preclude a tax credit for payments to a child's grandparents. Attention was focused on this effect by constituent
254 letters to members of Congress and an article by Ellen Goodman on the editorial pages of the Washington Post: "IRS Is Unfair to Grandma." Introduced by Representative Barber Conable, the measure replaced the existing restric- tion with two specific limitations: a relative may not be a dependent of the taxpayer and may not be a child of the taxpayer under the age of 19. Conable asserted that the present exclusion constituted a disincentive toward the superior care that a grandparent might provide. It also discriminated against low-income families who most often paid relatives to care for their children.9 3 The only opposition came from one member of Congress who feared that potential abuse would evoke a Treasury-IRS effort to eradicate the credit for payments to any rela- tive. In a strong dissent, Ways and Means Committee member For tney H. Stark argued "that a measure billed as aid for the poor or as an aid for working mothers will prove to be mostly just another unadministrable and unverifiable tax loophole." Despite this objection the measure easily passed the Congress and became law in November 1978. Effective for taxable year 1979 the revenue loss was estimated at $36 million.9 4 On the political horizon loom two possible revisions in the child care credit: refundability and an increase in the size of the credit. There appears to be substan- tial support for raising the 20 percent credit. Several conservatives want to link this increase to a reduction in Title XX funds earmarked for day care. Although liberal members support a higher credit, they oppose the Title XX trade-off unless a refundability provision is enacted. Conservatives oppose refundability on principle despite its relatively low estimated revenue loss of $38 million. The outcome of this policy debate is uncertain. NOTES Joseph A. Pechman, Federal Tax Policy (New York, 1971), 43. The best single work on tax policy making is John F. Manley, The Politics of Finance (Boston: 1970). See also Pechman, Tax Policy, 7-104; and Richard F. Fenno, Jr., Congressmen in Committees (Boston: passim for general discussions of tax policy. 2 The discussion of the history of the federal income tax is drawn from Pechman, Tax Policy, 247-249; Bureau of the Census, Historical Statistics of the United States: Colonial Times to 1970 (Washington, D.C.: 1973),
255 1976), 1090-1096; and C. McCarthy et al., The Federal Income Tax: Its Sources and Application (New Jersey, 1968), passim. 3 Henry C. Smith v. Commissioner, 40 B.T.A. 1038. 4 Alan Feld, "Deductibility of Expenses for Child Care and Household Services: The New Section 214," Tax Law Review, 27 (1972); and William Klein, "Tax Deductions for Family Care Expenses," Boston College Industrial and Commercial Review, 14 (1973). l 5 Bureau of the Census, Statistical Abstract of the United States, 1954. 6 Gilbert Steiner, The Children's Cause (Washington, D.C.: 1976), 16-18; and Department of Labor: Women's Bureau, Planning Services for Children of Employed Mothers (Washington, D.C.: 1953), 10. 7 Report of the Joint Committee on Taxation (April 21, 1953), 52-55. BUSS. Congress, Hearings before the House Committee on Ways and Means on General Revenue Revision, 83:1 (1953), 49-52. 9Ibid., 37-41. Unrepresentative Samuel W. Yorty, February 18, 1953, Congressional Record--Appendix, A937. unrepresentative Louis B. Heller, Hearings before . . . Ways and Means General Revenue Revision, 57-58. |2 Representative James C. Davis, June 9, 1953, Congressional Record--Appendix, A4191; Representative Wesley D. Ewart, Hearings before . . . Ways and Means on General Revenue Revision, 58-59. and Davis, ibid., 33-36. i3 Representative Leonore K. Sullivan, Hearings before . . . Ways and Means on General Revenue Revision, 31-33. |4 Nancy Henderson, ibid., 61-63. Tibia., 37-41. i6 Ibid., 49-52. i7Ibid., 53. Rabid., 63. i9Report of the (Treasury Department) Subcommittee on Deduction of Expenses of Child Care (July 15, 1953), Treasury Department Document (cited henceforth as TDD); and The Budget: Message from the President, January 21, l9S4, House Document 83-264. 2 ° House Report 83-1337 (1954). The exact source of the "available data" on child care costs and age is not clear from the legislative record. Apparently, the committee was referring to a study of child care arrangements in Wichita, Kansas.
256 2 1 Senate Report 83-1622 (1954). 2 2 Ibid. 2 3 Conference Report 83-2543 (1954). The revenue and household estimates are given in the respective reports of each chamber. 24 Internal Revenue Code (1954), Section 214. 2 5HR12470, 87th Congress, 2nd Session (1962). The survey of bills related to the child care deduction is drawn from the Congressional Record--Indices (1957-1962). 2 6 James Sundquist, Politics and Policy: The Eisenhower, Kennedy and Johnson Years (Washington, D.C.: 1968), 34-56. 27 Message from the President (January 24, 1963), House Document 88-43. 2 ~ Although the commission issued its final report subsequent to the administration's proposals for tax reform, the commission's recommendations and general findings were known to the administration when it drafted the proposals. 29 President's Commission on the Status of Women, Report of the Commission on Social Insurance and Taxes 1963), passim. (Washington, D.C.: 3 °Ibid. 3 president's Commission on the Status of Women, Re rt of the Committee on Home and Community P° (Washington, D.C.: 1963), passim. 3 2 U. S. Congress, Hearings before the House Committee . on Ways and Means on the President's Tax Message, 88:1 (1963), 6-7, 42-43, 86-87, 3 3 Ibid., 750-761. 3 4 House Report 88-27 (1963); and P.L. 88-4. 35 February 26, 1963, Congressional Record--House, 2999; and March 19, 1963, Congressional Record--Senate, 4544-4545. 36 (Treasury Department) Subcommittee Report: Child Care Deduction (January 17, 1963), TDD. 37 Surrey: Memo to Files (April 23, 1963), TDD; and Surrey: Child Care (June 5, 1963), TDD. 3 ~ House Report 88-749 (1964). 3 9 Undersecretary Henry H. Fowler to Assistant Secretary of Labor Esther Peterson, Augus_ 28, 1963, TDD; and Bureau of the Budget--Legislative Reference File G3-6/63.6: Volume II (1963) Record Group 51, National Archives. 4 ° October 3, 1963, Congressional Record--Senate, 23252-23253. 4 ~ Senate Report 88-830 (1964) 202-208, 592-595. \ .
257 42 Ibid. 4 3 Conference Report 88-1149 (1964); and P.L. 88-272, Sections 212-214. 44 Congressional Record--Indices (1965-1971); Statistics of Income: 1960, 1966. 4 5 May 4, 1966, Congressional Record--House, 9845. 4 6 Nolan to ABA, TDD. 4 7 Schuldinger: Deduction for Child Care (November 24, 1971), TDD, discussed the Viorst proposal in detail. 48 November 15, 1971, Congressional Record--Senate, 41251-41252. 4 9 Citizens' Advisory Council on the Status of Women, Women and Their Families in Our Rapidly Changing Society (Washington, D.C.: 1968), passim. 50 Citizens ' Advisory Council on the Status of Women, Report of the Task Force on Women's Rights and Responsibilities (Washington, D.C.: 1970), passim. Noncitizens' Advisory Council on the Status of Women, Re rt of the Task Force on Social Insurance and Taxes po (Washington, D.C.: 1968), passim. 52 Ibid. S 3 Ibid. S 4 Grace Blumberg, "Sexism in the Tax Code: A Comparativ'e Study of Income Taxation of Working Wives and Mothers," Buffalo Law Review, 21 (1971-72), passim. 55 June 4, 1971, Congressional Re_ord--Senate, 18106. "VFor a discussion or the Nixon aam~n~scrac~on-s Family Assistance Plan see Daniel P. Moynihan, The Politics of a Guaranteed Income (New York: 1973). 5 7 June 4, 1971, Congressional Record--Senate, 18106 5 Senate Report 92-437 (1971). 5 9 Ibid. 6 ° November 12, 1971, Congressional Record--Senate, 40934-40935. 6} Ibid. 6 2 November IS, 1971, ibid., 41251-41252. 6 3 Ibid., 41252. 6 4 Ibid., 41253. 6 5 Ibid., 41253-41256. 6 6 Bird: Child Care Deduction (November 30, 1970), Joint Committee on Taxation Document (cited hereafter as JCTD); and Michael Bird, Joint Committee on Taxation, to Stanley S. Surrey, June 22, 1971, JCTD. 67 Office of Tax Analysis: Treasury Position before the Conference Committee (November 24, 1971), TDD; and Re: Tunney Amendment (no date), TDD. 68 Ibid.
258 69 Ibid. 7 Conference Report 93-708 (1971). 7 Miriam Schwartz Alers, "Dependency and the Loss of Benefits Under Section 214 of the 1971 Tax Code," Case and Comment (November-December 1974), 44-50; Blumberg, "Sexism in the Tax Code," passim; Feld, "Deductibility of Expenses for Child Care," 415-447; Carol S. Greenwald and Linda G. Martin, "Broadening the Child Care Deduction: How Much Will It Cost?" New England Economic Review (September-October 1974), 22-30; Roland L. Hjorth, "A Tax Subsidy for Child Care: Section 210 of the Revenue Act of 1971," Taxes, 50 (1972), 433-445; John B. Keane, . "Federal Income Tax Treatment of Child Care Expenses," Harvard Journal on Legislation, 10 (1972), 1-40; and Klein, "Tax Deduction for Family Care Expenses," 917-941. 72 John V. Tunney, "You've Been Singled Out"' Single Parent (May, 1972), 3-5. 7 3 October 5, 1972, Congressional Record--Senate, 33869. 7 4 Ibid., 33870-33873. 75 Frederic W. Hickman, Deputy Assistant Treasury Secretary to Long, April 28, 1972, TDD. 7 6 Congressional Record--Indices (1972-75); and Oppenheimer to Hickman: Simplification, Prior Conference with Larry Woodworth (April 4, 1973), TDD. 77Balle to Hickman: Child Care Deduction (April 4, 1975), TDD. 78Canty: Child Care (May 21, 1974), TDD; and Joint Committee on Taxation Report 22-74 (November 18, 1974), 4. 79 Bird to Woodworth: Further liberalization of the child care deduction (June 4, 1974), JCTD. 8°Woodworth to Representative James R. Jones, October 20, 1975, JCTD. Congress and the Nation, IV, 89-90, 100. ~ 2 Ibid., 91-95; March 12, 1975, and March 21, 1975, Congressional Record--Senate, 53780-53781, 54651-54652. ~ 3 March 21, 1975, Congressional Record--Senate, 54652-54653. ~ 4 Senate Report 94-36 (1975); and Conference Report 94-120 (1975). Disinformation provided by staff and members of the House Committee on Ways and Means. ~6 Ibid. ~ 7 House Report 94-658 (1975). 88U.S. Congress, Hearings before the Senate Finance Committee, 94:2 (1976), 94; and Tax Simplification: Credit for child care expenses (May 17, 1976), TDD.
259 89U.S. Congress, Hearings before the Senate Finance Committee, 94:2 (1976), 227; and July 21, 1976, Congressional Record--Senate, S12151-S12152. 90 July 21, 1976, Congressional Record--Senate, S12152-S12154. suboffice of Management and Budget, Legislative Reference File G3-14/75.5 (1976); and Conference Report 94-1515 (1976). 9 2 Calculations derived from Internal Revenue Service, Statistics of Income: 1976 (Washington, D.C.: 1978), 86. All figures are rounded. 9 3 House Report 95-1092 (1978). 94Ibid., and P.L. 95-600.
Appendix A Legislative Changes in the Child Care Date of Final Eligible Eligible Size of Enactment Households Expenses Deduction 1954 widowed or divorced any expenses $600 maximum mothers, widowers incurred in regardless of itemized with children, caring for a number of deduction mothers with Inca- child or children pacitated spouses, dependent families in which physically or both parents work mentally in and f ile a joint capable of tax return caring for himself--if the care expense s allow th e parent (s) to pursue gainful, full-time employmen t . . 1964 (wives deserted by unchanged $600 for one the i r bus band s f or dependen t, S9 O O i temized one year were made for two or more deduction eligible in 1963) single fathers and f ether s w ith incapa c i bated w ive s adde d 1971 unchanged included $400 per Month expenses for allowed for in itemized housekeeping home care; out deduction of-home: S200 per month for one child, S300 for two, $400 for three or mor e 1975 unchanged unchanged unchanged i temi zed deduction 1976 a parent maintaining care expenses 20% credit for the household of a to allow care expenses up credit child, even if he parent to to S2,000 per is not eligible attend school year for one for the tax exemption, full-time, child, $4,000 for can credit care also for part- two or more; costs against his time work up maximum credit $400 taxes; a spouse to the amount for one child, deserted for six of income $8()0 for two or months or more is made more; all distinc eligible Lions between in and ou t-of -home care abolished 1978 unchanged unchanged unchanged c red i t 260
Tax Deduction/Credit, 1953-197 8 Income Limitation Age Limi t Miscellaneous Estimated Provisions Revenue Loss - - $4,500, deduct ion reduced $1 for S1 over 1 imi tat ion-- phased out at $5,000 under 12 i ncome 1 imi t appl ies only to households i n wh ich both parents worked $140 million $6,000, same under 14 marg inal reduction none $20 mill ion S18, ooo, deductions re- duced 50d per S1 over 1 imitation-- phase-ou t a t S27, 60 0 under 15 income 1 imit applies to all households claiming the deduc t ion . . . $145 million S35,000 mar- g inal phase- out S44,600 none unchanged none S107 million unchanged payments to non-de pendent relatives, who are members of taxpayer 's household, a r e deduc t ible- provided their services constitute employment for social security purposes S325 million u nchang ed unc hen 9 ed all payments except those to a dependent or child under 19 of the taxpayer are eligible $36 million 261
Appendix A (continued) Distr ibution of Households and Tax Savings by Income Class 1954 Under $5, 000 Over S5,000 213,000 $ 12 million (67%) 60,000 S 6 million (33%) Totals273,000 S 18 million 1966 Under S5,000 99~000 $ 7 million (33%) SS - $10,000 136,000 $ 12 million (57%) $10 - $15,000 14,000 S 1 million (5%) Over Sl5,oOo 5,000 S 1 million (5% ) Totals 254,000 $ 21 million 1972 Under S5,000 47,000 $ 4 million (2%) $5 - $10,000 455,000 S 49 million (24%) Slo - $15,000 625,000 S 74 million (36%) Over $15,000 442,000 $ 81 million (39%) Totals 1,569,000 $208 million 1975 Under S5,000 8,000 S 1 million (.4%) $5 - S10,000 344,000 S 52 million (19%) Slo - $15,000 604,000 S 96 million (35%) $15 - S20,000 575,000 $103 million (37%) Over S20,000 134,000 S 24 million (9%) Totals 1, 666, 000 S275 million 1976 Under S5,000 27,000 S 3 million (.7%) $5 - $10,000 365,000 $ 59 million (13%) $10 - S15,000 600,000 $ 89 million (19%) S15 - 20,000 709,000 Slll million (24%) Over $20,000 959,000 S196 million (43%) Totals 2, 660, 000 $458 million not available 262
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